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Comprehensive Problem 16-65 (LO 16-1, LO 16-2, LO 16-3) (Algo)

[The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2021. 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	$ 43,600,000
Cost of Goods Sold	(29,430,000)
Gross profit	$ 14,170,000
Other income:
Income from investment in corporate stock	300,0001
Interest income	34,4002
Capital gains (losses)	(4,000)
Gain or loss from disposition of fixed assets	3,0003
Miscellaneous income	50,000
Gross Income	$ 14,553,400
Expenses:
Compensation	(7,536,000)4
Stock option compensation	(236,000)5
Advertising	(1,386,000)
Repairs and Maintenance	(93,000)
Rent	(40,000)
Bad Debt expense	(59,000)6
Depreciation	(1,850,000)7
Warranty expenses	(106,000)8
Charitable donations	(500,000)9
Meals (all at restaurants)	(21,600)
Goodwill impairment	(39,000)10
Organizational expenditures	(50,000)11
Other expenses	(176,000)12
Total expenses	$ (12,092,600)
Income before taxes	$ 2,460,800
Provision for income taxes	(400,000)13
Net Income after taxes	$ 2,060,800

1. XYZ 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 HCs 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 HCs earnings.
2. Of the $34,400 interest income, $8,600 was from a City of Seattle bond, $10,600 was from a Tacoma City bond, $9,600 was from a fully taxable corporate bond, and the remaining $5,600 was from a money market account.
3. This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as 1231 gain).
4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).
5. This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are officers).
6. XYZ actually wrote off $36,000 of its accounts receivable as uncollectible.
7. Tax depreciation was $2,350,000.
8. In the current year, XYZ did not make any actual payments on warranties it provided to customers.
9. XYZ made $500,000 of cash contributions to qualified charities during the year. The donations are qualified charitable contributions for purposes of determining the charitable contribution limitation.
10. On July 1 of this year XYZ acquired the assets of another business. In the process, it acquired $354,000 of goodwill. At the end of the year, XYZ wrote off $39,000 of the goodwill as impaired.
11. XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes.
12. The other expenses do not contain any items with booktax differences.
13. This 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 $480,000 ($120,000 per quarter). For purposes of estimated tax liabilities, assume XYZ was in existence in 2020 and that in 2020 it reported a tax liability of $668,000. During 2021, XYZ determined its taxable income at the end of each of the four quarters as follows:

Quarter-end	Cumulative taxable income (loss)
First	$ 490,000
Second	$ 1,190,000
Third	$ 1,580,000

Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

Comprehensive Problem 16-65 Part a (Algo)

a. Compute XYZs taxable income.

b. Compute XYZs income tax liability.

c. Complete XYZs Schedule M-1. (Enter all amounts as positive numbers.)

Schedule M-1: Reconciliation of Income (Loss) per Books With Income per Return 1. Net income (loss) per books 2. Federal income tax provision 3. Excess of capital losses over capital gains 4. Income subject to tax not recorded on books this year (itemize) 5. Expenses recorded on books this year not deducted on this return (itemize): a. Depreciation b. Contributions carryover c. Meals Stock option compensation (incentive stock options) Bad debt expense Warranty expense Goodwill impairment Organizational expenditures 6. Total $0 7. Income recorded on books this year not included on this return (itemize): Tax-exempt interest Income from investment in corporate stock 8. Deductions on this return not charged against book income this year (itemize): a. Depreciation b. Contributions carryover 9. Total 0 10. Income

e. Determine the quarters for which XYZ is subject to underpayment of estimated tax penalties. (Round "Annualization Factor" for Fourth quarter to 2 decimal places.)

	Installment (1) Required cumulative payment (per quarter) under prior year tax method (2) Estimated tax payment under annualized method (3) Required payment based on current year tax liability (4) Required cumulative payment (5) Actual payments Underpayment penalty 1st quarter $490,000 2nd quarter $119,000 3rd quarter 4th quarter

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