The following additional information applies.
1. Dividends were from Star Corporation, a 30%-owned domestic
corporation.
2. Interest revenue consists of interest on corporate bonds, $15,000;
and municipal
bonds, $3,000.
3. The stock is a capital asset held for three years prior to sale.
4. Rocket uses the specific writeoff method of accounting for bad
debts.
5. Interest expense consists of $11,000 interest incurred on funds
borrowed for working
capital and $1,000 interest on funds borrowed to purchase municipal
bonds.
6. Rocket paid all contributions in cash during the current year to
State University.
7. Rocket calculated depreciation per books using the straight-line
method. For income
tax purposes, depreciation amounted to $85,000.
8. Other expenses include premiums of $5,000 on the key-person life
insurance policy
covering Rocket’s president, who died in December.
9. Qualified production activities income is $250,000.
Required: Prepare a worksheet reconciling Rocket’s book income with
its taxable
income (before special deductions). Six columns should be used—two
(one debit and one
credit) for each of the following three major headings: book income,
Schedule
M-1 adjustments, and taxable income. (See the sample worksheet with
Form 1120 in
Appendix B if you need assistance).
Problem C3-59
Reconciling Book Income and Taxable Income. Zero Corporation
reports the following
results for the current year: