Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on an installment sale of $25,000. The corporation's current earnings and profits for 20X3 would be:

Question

Quizplus · Accepted Answer

To find the current earnings and profits, we start with taxable income and make adjustments based on items that affect earnings and profits. These adjustments are different from those made in the computation of taxable income.
Adjustments for current earnings and profits: 
Taxable income: $500,000 
Add: 
Disallowed meals and entertainment expense: $2,000 
Tax-exempt income: $1,000 
Deferred gain on installment sale: $25,000 
Earnings and profits: $528,000 
However, we must also subtract the federal income taxes paid of $170,000 as they reduce earnings and profits. 
So, Current earnings and profits for 20X3 would be $528,000 - $170,000 = $358,000. 
The closest option is C) $354,000.

Grand River Corporation Reported Taxable Income of $500,000 in 20X3