Question

Compute HC Inc.’s current-year taxable income given the following information relating to its 2019 activities. Also, compute HC’s Schedule M-1 assuming that HC’s federal income tax expense for book purposes is $30,000. Use Exhibit 16-6.

• Gross profit from inventory sales of $310,000 (no book–tax differences).
• Dividends HC received from 28 percent-owned corporation of $120,000 (this is also HC’s pro rata share of the corporation’s earnings).
• Expenses other than DRD, charitable contribution (CC), and net operating loss (NOL), are $300,000 (no book–tax differences).
• NOL carryover from prior year of $12,000.
• Cash charitable contribution of $50,000.

Description	Book Income	Book-tax adjustments		Taxable Income
	(Dr) Cr	(Dr)	Cr	(Dr) Cr
Gross profit	$310,000			$310,000
Other income:
Dividend income	120,000			120,000
Gross Income	$430,000			$430,000
Expenses:
Business expenses other than DRD, CC, and NOL	(300,000)			(300,000)
Federal income tax expense	(30,000)		30,000
Total expenses before charitable contribution, NOL, and DRD deduction	(330,000)			(300,000)
Income before charitable contribution, NOL and DRD	$100,000			$130,000
NOL carryover from prior year		(12,000)		(12,000)
Taxable income for charitable contribution limitation purposes (modified taxable income)				$118,000
Charitable contributions	(50,000)		38,200	(11,800)
Taxable income before DRD				$106,200
Dividends received deduction (DRD)		?		?
Book/Taxable income	$50,000	$(108,560)	$68,200	$106,200

Answer 1