1. Compute MV Corp.’s 2018 taxable income given the following information relating to its year 1 activities. Also, compute MV’s Schedule M-1 assuming that MV’s federal income tax expense for book purposes is $100,000. Gross profit from inventory sales of $500,000 (no book-tax differences).
Dividends MV received from 25 percent-owned corporation of $100,000 (assume this is also MV’s pro rata share of the distributing corporation’s earnings).
Expenses other than DRD, charitable contribution (CC), and net operating loss (NOL), are $350,000 (no book–tax differences).
NOL carryover from prior year of $10,000.
Cash charitable contribution of $120,000.
Description Book Book-tax adjustments Taxable
Income Income
(Dr)Cr (Dr) Cr (Dr)Cr
Gross profit $500,000 $500,000
Other income:
Dividend income $100,000 $100,000
Gross Income $600,000 $600,000
Expenses:
Business expenses
other than DRD, CC,
and NOL (350,000) (350,000)
Federal income
tax expense (100,000) 100,000
Total expenses before
charitable contribution,
NOL, and DRD (450,000) (350,000)
Income before charitable
contribution, NOL,
and DRD $150,000 $250,000
NOL carryover from
prior year (10,000) (10,000)
Taxable income for charitable
contribution limitation purposes
(modified taxable income) $240,000
Charitable contributions (120,000) 96,000 $24,000
Taxable income before DRD 216,000
Dividends received
deduction (DRD) (65,000) (65,000)
Taxable income $30,000 $75,000 $196,000 $151,000
2. Compute MV's Schedule M-1 assuming that MV's federal income tax expense for book purposes is $100,000.