XYZ is a calendar-year corporation that began business on January 1, 2023. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corporation Income statement For current year Book Income Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock 300,0001Footnote 1 Interest income 20,0002Footnote 2 Capital gains (losses) (4,000) Gain or loss from disposition of fixed assets 3,0003Footnote 3 Miscellaneous income 50,000 Gross Income $ 13,369,000 Expenses: Compensation (7,500,000)4Footnote 4 Stock option compensation (200,000)5Footnote 5 Advertising (1,350,000) Repairs and Maintenance (75,000) Rent expense (22,000) Bad Debt expense (41,000)6Footnote 6 Depreciation (1,400,000)7Footnote 7 Warranty expenses (70,000)8(70,000) to the power of 8 Charitable donations (500,000)9Footnote 9 Meals (36,000) Goodwill impairment (30,000)10Footnote 10 Organizational expenditures (44,000)11Footnote 11 Other expenses (140,000)12Footnote 12 Total expenses $ (11,408,000) Income before taxes $ 1,961,000 Provision for income taxes (400,000)13Footnote 13 Net Income after taxes $ 1,561,000 1Footnote 1XYZ owns 30% of the outstanding Hobble Corporation (HC) stock. Hobble Corporation reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method, and it recorded its pro rata share of HC's earnings for the year. HC also distributed a $200,000 dividend to XYZ. For tax purposes, HC reports the actual dividend received as income, not the pro rata share of HC's earnings. 2Footnote 2Of the $20,000 interest income, $5,000 was from a City of Seattle bond, $7,000 was from a Tacoma City bond, $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account. 3Footnote 3This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as §1231 gain). 4Footnote 4This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation). 5Footnote 5This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are officers). 6Footnote 6XYZ actually wrote off $27,000 of its accounts receivable as uncollectible. 7Footnote 7Tax depreciation was $1,900,000. 8Footnote 8In the current year, XYZ did not make any actual payments on warranties it provided to customers. 9Footnote 9XYZ made $500,000 of cash contributions to charities during the year. 10Footnote 10On July 1 of this year, XYZ acquired the assets of another business. In the process, it acquired $300,000 of goodwill. At the end of the year, XYZ wrote off $30,000 of the goodwill as impaired. 10Footnote 10XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes. 12Footnote 12The other expenses do not contain any items with book–tax differences. 13Footnote 13This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes. Estimated tax information: XYZ made four equal estimated tax payments totaling $360,000 ($90,000 per quarter). For purposes of estimated tax liabilities, assume XYZ was in existence in 2022 and that in 2022 it reported a tax liability of $500,000. During 2023, XYZ determined its taxable income at the end of each of the first three quarters as follows: Quarter-end Cumulative taxable income (loss) First $ 400,000 Second $ 1,100,000 Third $ 1,400,000 Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. Note: Do not round intermediate calculations. Round your answers to the nearest dollar amount. a. Compute XYZ's taxable income. b. Compute XYZ's income tax liability.
XYZ is a calendar-year corporation that began business on January 1, 2023. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6.
| XYZ corporation Income statement For current year | Book Income |
|---|---|
| Revenue from sales | $ 40,000,000 |
| Cost of Goods Sold | (27,000,000) |
| Gross profit | $ 13,000,000 |
| Other income: | |
| Income from investment in corporate stock | 300,0001Footnote 1 |
| Interest income | 20,0002Footnote 2 |
| (4,000) | |
| Gain or loss from disposition of fixed assets | 3,0003Footnote 3 |
| Miscellaneous income | 50,000 |
| Gross Income | $ 13,369,000 |
| Expenses: | |
| Compensation | (7,500,000)4Footnote 4 |
| Stock option compensation | (200,000)5Footnote 5 |
| Advertising | (1,350,000) |
| Repairs and Maintenance | (75,000) |
| Rent expense | (22,000) |
| (41,000)6Footnote 6 | |
| Depreciation | (1,400,000)7Footnote 7 |
| Warranty expenses | (70,000)8(70,000) to the power of 8 |
| Charitable donations | (500,000)9Footnote 9 |
| Meals | (36,000) |
| (30,000)10Footnote 10 | |
| Organizational expenditures | (44,000)11Footnote 11 |
| Other expenses | (140,000)12Footnote 12 |
| Total expenses | $ (11,408,000) |
| Income before taxes | $ 1,961,000 |
| Provision for income taxes | (400,000)13Footnote 13 |
| Net Income after taxes | $ 1,561,000 |
1Footnote 1XYZ owns 30% of the outstanding Hobble Corporation (HC) stock. Hobble Corporation reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method, and it recorded its pro rata share of HC's earnings for the year. HC also distributed a $200,000 dividend to XYZ. For tax purposes, HC reports the actual dividend received as income, not the pro rata share of HC's earnings.
2Footnote 2Of the $20,000 interest income, $5,000 was from a City of Seattle bond, $7,000 was from a Tacoma City bond, $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a
3Footnote 3This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as §1231 gain).
4Footnote 4This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).
5Footnote 5This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are officers).
6Footnote 6XYZ actually wrote off $27,000 of its accounts receivable as uncollectible.
7Footnote 7Tax depreciation was $1,900,000.
8Footnote 8In the current year, XYZ did not make any actual payments on warranties it provided to customers.
9Footnote 9XYZ made $500,000 of cash contributions to charities during the year.
10Footnote 10On July 1 of this year, XYZ acquired the assets of another business. In the process, it acquired $300,000 of goodwill. At the end of the year, XYZ wrote off $30,000 of the goodwill as impaired.
10Footnote 10XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes.
12Footnote 12The other expenses do not contain any items with book–tax differences.
13Footnote 13This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes.
Estimated tax information:
XYZ made four equal estimated tax payments totaling $360,000 ($90,000 per quarter). For purposes of estimated tax liabilities, assume XYZ was in existence in 2022 and that in 2022 it reported a tax liability of $500,000. During 2023, XYZ determined its taxable income at the end of each of the first three quarters as follows:
| Quarter-end | Cumulative taxable income (loss) |
|---|---|
| First | $ 400,000 |
| Second | $ 1,100,000 |
| Third | $ 1,400,000 |
Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations.
Note: Do not round intermediate calculations. Round your answers to the nearest dollar amount.
a. Compute XYZ's taxable income.
b. Compute XYZ's income tax liability.
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