Question

Heron Corporation is a calendar-year, accrual-basis taxpayer. It provides the following information for this year and asks you to prepare Schedule M-1.
?

Net income per books (after-tax)	$239,700
Taxable income	195,000
Federal income tax liability	59,300
Interest income from tax-exempt bonds	5,000
Interest paid on loan incurred to purchase tax-exempt bonds	2,000
Life insurance proceeds received as a result of death of Heron’s president	100,000
Premiums paid on policy on life of Heron’s president	4,500
Excess of capital losses over capital gains	2,000
Retained earnings at beginning of year	375,000
Cash dividends paid	90,000
Tax depreciation in excess of book depreciation	7,500

In your analysis, include the following:

An introduction

Schedule M-1 (don’t forget to show your work)

Conclusion

Answer 1

Solution: Net income per books is reconciled to taxable income as follows:-

Net income per books 239,700

Plus: Items that decreased net income per books but did not affect taxable income

Plus: Federal income tax liability 59,300

Plus: Excess of capital losses over capital gains 2,000

Plus: Interest paid on loan incurred to purchase tax-exempt bonds 2,000

Plus: Premiums paid on policy on life of president of corporation. 4,500

Subtotal = 307,500

Minus: - Items that increased net income per books but did not affect taxable income

Interest income from tax-exempt bonds. 5,000.

Life insurance proceeds received as a result of death of corporate president. 100,000.

Tax depreciation in excess of book depreciation 7,500 Taxable income = 195,000.