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15,000,000 $10,000,000


For the current year ending December 31
Less cost sales.
Gross profit.....
Deduct selling, general and administration expenses:
Selling expenses.

$3,300,000 Advertising.

500,000 Collection expenses.

200,000 Losses on bad and doubtful accounts

200,000 General office salaries.....

100,000 Profit-sharing bonus of executives.

250,000 Depreciation..

200,000 Taxes: Real and personal property taxes.

50,000 Capital stock tax.

5,000 Special assessments.

Life insurance policy premiums..

Charitable contributions:
Public subscriptions..

Employes' welfare..

Net profits from operations..
Add other income:

Dividends received from domestic corp.... $100,000
Dividends on foreign investments...

Interest received...

10,000 Deduct: Interest paid...

$250,000 Proportion of bond discounts written off..

Net profits......

Expenses in connection with issue of
capital stock.

$ 50,000
Provision for Federal income taxes (pre-
liminary estimate)..

Special reserve against inventory.

500,000 Surplus profits..

Balance at the beginning of the year.
Surplus profits for year....

4,875,000 $5,125,000

160,000 $5,285,000

260,000 $5,025,000

2,550,000 $2,475,000

$2,650,000 2,475,000 $5,125,000


Excess of Federal taxes actually paid over amount

provided at December 31, preceding year, ... $100,000 Cash dividends paid on preferred stock during

current year: January 31..

$20,000 April 30..

20,000 July 31..

20,000 October 31.

15,000 75,000 Dividends paid on common stock during

current year: In cash February 28.

August 31...

250,000 500,000
In stock
August 31...

1,000,000 Reserve for redemption of preferred stock.


2,050,000 $3,075,000


Condensed Trial Balance (After Closing)

For the beginning and end of the current year

December 31

Cr. $3,500,000


stock. ......



100,000 5,000,000





January 1


Depreciation Reserve...

$500,000 Good Will acquired for

Investments in stock of

other corporations at

(25% interest)... 250,000

(20% interest)... 100,000 Inventories...... 3,000,000 Inventory reserves.

500,000 Receivables..

2,500,000 Bad Debt reserves..

100,000 Cash......

1,400,000 Bond discount.

90,000 Commission paid on is

sue of common stock 60,000 Prepaid expenses..

50,000 Preferred Stock...

1,500,000 Common Stock.

2,500,000 Bonds.....

1,000,000 Current Liabilities....

Provision for federal

income and profits

Contingent reserve...

Reserve for redemption
of preferred stock..

Earned surplus...

Capital surplus result-

ing from appraisal of

$11,450,000 $11,450,000




1,125,000 4,500,000 1,000,000 1,105,000



525,000 2,575,000


$15,530,000 $15,530,000

From the preceding information, prepare an income tax statement showing only gross income, deductions from income, and computation of the tax. (No Balance Sheets required.)

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9. The White Motor Corporation has a capital of $250,000.00. They set aside a percentage of earnings as a bonus for their employees. The profit for the year amounts to $75,000.00. The income tax of 1212% is to be figured after deducting the bonus. The bonus amounts to 10% of the earnings after deducting the income tax and a 15% dividend.

Compute the amount of the dividend, bonus and income tax.

(Note. The problem does not state whether the yearly profit of $75,000.00 represents earnings before or after deduction of the bonus. Since a bonus is an expense, some might contend that it should be deducted in determining the profit on which the rate of the bonus applies. However, it is, undoubtedly, more logical to assume that the amount of the profit stated in the problem represents the net erating profits before deducting the amount of the bonus and that it is to be used as the basis of the bonus after the income tax and a 15% dividend are deducted. It is, of course, understood from the statement of the problem that the bonus is itself a deduction in determining the amount of the income tax.)

10. The Home Outfitting Company, incorporated under the Laws of the State of Ohio, has been in business for the past two years. The following statement taken from the books reveals the financial condition of the company at the beginning and end of the current fiscal year and the results of the operations for the current year ending June 30.

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Cost of Merchandise Sold...
Salaries of Officers..
Commissions Paid Salesmen.
Miscellaneous Expenses.
Profits Earned.

$ 45,000.00

15,000.00 10,000.00 2,000.00 3,000.00 75,000.00

Total Installment Sales...


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The collections for the year amounted to $90,000.00 of which $35,000.00 was applicable to the installment sales of the previous year. No part of the collections applicable to the sales of the previous year need be reported as income for the current year because the gross profit to be realized on the installment sales was reported in the Income Tax Return for the previous year. In making the return for the current year, only the profit derived from collections applicable to the installment sales of the current year need be reported.

In computing the profits, the obligations of purchasers were treated as the equivalent of cash. In other words, the gross profit to be realized on the total installment sales was taken as an earned profit for the year in which the sales were made. Under the present Income Tax Law, it is permissible for a taxpayer to report his income on a basis of the profits realized on the collections received during the year. It is desired to take advantage of this provision of the Law and you are asked to draft a journal entry which will change the books in accord with the current Regulations and prepare a statement of the income tax for the current year. You should also prepare a Comparative Balance Sheet as at the beginning and end of year taking into consideration the adjustment on account of the deferred installments.

After preparing the income tax statement and Comparative Balance Sheets, you may prepare a statement showing the computation of the Company's capital stock tax. This tax is based upon the fair value of the total capital stock. You may assume that the assets and liabilities, as stated in the Balance Sheet of June 30, after adjustment of Installment Accounts Receivable, represents fair values, hence the net worth of the Company as exhibited by the Balance Sheet may be considered the fair value of the total capital stock.

Review Problems I. In 1909 C. H. Purdy and Frank Rodman formed a corporation for the purpose of conducting the business then carried on by them under a partnership, the capital stock being divided equally. Mr. Rodman died on June 1, 1917, bequeathing his shares of stock to his son Charles by will. Because of Mr. Rodman's death, the corporation ceased active business and began to liquidate. From time to time assets were disposed of and dividends were declared and paid from the moneys received. What is the status of such dividends for Federal income tax purposes, assuming the dividends were paid during the current year:

(a) As regards C. H. Purdy?
(b) As regards Charles Rodman?

2. You are employed by Paul F. Fusselman, a married man, to prepare his Income Tax Return for the current year.

His income and expenditures for the year ending December 31, are as follows:

Expenses Income Salary....

$10,000.00 Interest on Real Estate Mortgage.

960.00 Dividends U. S. Steel Corporation.

1,200.00 Rentals....

2,200.00 Interest, Bonds U. S. Steel Corp'n....

1,000.00 Interest, U. S. Government 35..

2,400.00 Interest, City of Detroit 4s..

4,000.00 Gain Sale of Real Estate...

500.00 Inheritance, Stock Penna. Ry. Co., Par.

25,000.00 Life Insurance Benefit.....

5,000.00 Special fee as commissioner of estate.

500.00 Allowance, to wife....

$2,000.00 Household Expenses, including rent

9,620.00 Fire Loss, Tenement Property (net)

650.00 Interest Bank Loans.

5,400.00 Life Insurance Premiums.

600.00 Taxes, City, State and County.

220.00 Automobile.....

2,500.00 Charitable Donations ....

400.00 Losses Stock Exchange Operations.

4,400.00 Losses Bad Debts....

1,750.00 Taxes-Special Paving ..

50.00 Depreciation of Buildings..


Prepare Statement of Income Tax for current calendar year.

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