🎯Tax Vs Book: 21 MCQs

Responses

1. 

   Brian 해피 18 December 2023

   Warranty cost in Book is $33,000 and $48,000 paid actually from my understanding. Then I figure that +740K+33K-48K=725K is the taxable income. Please correct me if I am wrong.

   1. 

      Brian 해피 18 December 2023

      , which is about Question #6. Thanks

      1. 

         Deleted User 22 January 2024

         Hello Brian,

         Calculation again based on the information provided:

         Start with book income: $740,000
         Add back estimated warranty expense: +$48,000 (because this expense was deducted for book purposes but is not eligible for a tax deduction)
         Deduct actual warranty costs: -$33,000 (because this is a deductible expense for tax purposes)
         So, the correct calculation is:

         Book Income+ Estimated Warranty Expense − Actual Warranty Costs

         $740,000 + $48,000 – $33,000 = $755,000

         Therefore, the taxable income that should be reported by Castle Corp. for the year 20X4 is indeed $755,000, and the correct answer is choice “B.”

         Hope this makes sense !

   2. 

      Deleted User 22 January 2024

      Hello Brian,

      Calculation again based on the information provided:

      Start with book income: $740,000
      Add back estimated warranty expense: +$48,000 (because this expense was deducted for book purposes but is not eligible for a tax deduction)
      Deduct actual warranty costs: -$33,000 (because this is a deductible expense for tax purposes)
      So, the correct calculation is:

      Book Income+ Estimated Warranty Expense − Actual Warranty Costs

      $740,000 + $48,000 – $33,000 = $755,000

      Therefore, the taxable income that should be reported by Castle Corp. for the year 20X4 is indeed $755,000, and the correct answer is choice “B.”

      Hope this makes sense !

2. 

   Thomas 20 January 2024

   I am still a bit confused regarding the warranty issues in question #6, where the answer says the corporation incurred $48000, but actually paid $33000 in 20X4. My understanding the exactly in the opposite way. So here “recognized in the financial statement” means actually paid? please clarify.

   1. 

      Deleted User 21 January 2024

      Hello Thomas,

      In accounting terminology, “recognized in the financial statements” doesn’t necessarily mean the same as “actually paid.” Recognition refers to when an expense is recorded on the financial statements, regardless of whether the payment has been made.

      In the given scenario:

      The company incurred warranty costs of $48,000.
      However, only $33,000 of these costs were recognized as expenses on the financial statements.
      This means that the company recorded $33,000 as an expense on its financial statements, even though the total incurred cost was $48,000. The $15,000 difference between the total incurred cost and the amount recognized is likely due to either estimates, provisions, or accruals for future payments.

      So, when calculating taxable income, we consider the amount recognized on the financial statements, not the actual cash payment. In this case, the adjustment to taxable income would be +$33,000 to reflect the recognized warranty expense.

      Hope this makes sense !

3. 

   JOHN MAGENA 23 June 2024

   Pardon me but how about adding back $48000 to $74000 because it was originally deducted to arrive at 740000.Secondly ,subtract $33000 and ARRIVE AT $755000.ANY THOUGHTS

   1. 

      Maroun, CPA 24 June 2024

      Hi John,

      This is exactly what should be done.
      The financial statements recognized $48,000 of estimated warranty expenses. This is an estimate based on future obligations. For tax purposes, only actual expenses incurred are deductible. The $48,000 estimated expense is not allowed as a deduction for tax purposes because it is not an actual, realized cost. Thus, this amount must be added back to book income to adjust for the overstatement of expenses in the financial statements.
      The actual warranty costs incurred during the year, amounting to $33,000, are deductible for tax purposes. This amount must be subtracted from the adjusted book income to reflect the actual deductible expense.

      I hope this helps!

4. 

   SImon Obiekwe 19 October 2024

   If Fast Solution were to be an accrual-basis taxpayer, how would the note and accumulated interest be treated?

   1. 

      Maroun, CPA 22 October 2024

      Hello SImon,

      If Fast Solution were operating as an accrual-basis taxpayer, the treatment of the note and accumulated interest would be quite different.

      Under the accrual method, income is recognized when it is earned, regardless of when cash is received. In this case, Fast Solution would have recognized the $15,000 note as income in March, along with the accrued interest over the three months until Porter Co. declared bankruptcy.

      When Porter Co. declared bankruptcy, the note became worthless, and Fast Solution could claim a bad debt expense for both the principal ($15,000) and the accrued interest up to that point. The accrued interest would be 7% annual rate × 3/12 months × $15,000 = $262.50. Therefore, the total bad debt deduction would be $15,262.50.

      I hope this helps!

5. 

   SImon Obiekwe 19 October 2024

   Premiums paid on an insurance policy where the beneficiary is named by the insured employee, I believe is a non-deductible expense for tax purposes but may be recorded as an expense in the books. If this correct, will this not be a reconcilation item in the Schedule M-1

   1. 

      Maroun, CPA 22 October 2024

      Hello SImon,

      You are partially correct. Whether these premiums are deductible depends on who the beneficiary is and whether the policy benefits the business or the employee. If the corporation is the beneficiary, such as with key-person life insurance, the premiums are non-deductible for tax purposes but still recorded as an expense in the books. This creates a permanent difference and would be reported on Schedule M-1.

      However, if the policy benefits the employee and they name the beneficiary, the premiums are considered a deductible employee benefit. In this case, there is no difference between book and tax treatment, and no Schedule M-1 adjustment would be required.

      In the scenario from the question, since the insured employee names the beneficiary, the premiums are treated as a deductible employee benefit, meaning they will not appear on Schedule M-1.

      I hope this clears things up. Let me know if you have further questions!

6. 

   Seth Ponce 10 May 2025

   Question 13 says “tart up costs” i think this is suppose to be start up costs?

   1. 

      Maroun, CPA 12 May 2025

      Hello Seth,

      you’re absolutely right. It should read “start-up costs.”
      I’ve corrected the typo. Thank you for bringing this to our attention!