Au Sable Corporation reported taxable income of $800,000 in year 2 and paid federal income taxes of $168,000.Not included in the computation was a disallowed penalty of $25,000, and life insurance proceeds of $100,000.Included in the computation of taxable income is a deduction for the bargain element of exercised nonqualified stock options of $50,000.The corporation's current earnings and profits for year 2 would be:

Question

Quizplus · Accepted Answer

To compute current earnings and profits, we start with taxable income and make adjustments required by Internal Revenue Code(Rules & Regulations), such as adding back nontaxable income and nondeductible expenses.

Taxable income: $800,000 
Add back disallowed penalty: $25,000 
Add back life insurance proceeds: $100,000 
Subtract deduction for bargain element of exercised nonqualified stock options: $50,000

Thus, the current earnings and profits for year 2 is $707,000 ($800,000 + $25,000 + $100,000 - $50,000 = $875,000, $875,000 - $168,000 = $707,000).

Au Sable Corporation Reported Taxable Income of $800,000 in Year