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Question
CPA-00813
Answer
When they give you financial accounting income, you need then figure out what is the taxable income as follows:

Financial Accounting Income $
Deduct: Non-taxable Income (typically municipal bonds)
Add: Non-deductible Expense (like a penalty or fine or premiums paid on officers life insurance)
Deduct: Expenses for tax that exceed financial account (like depreciation expense)
Add: Income that is taxable now (like the receipt of prepaid rent from a tenant)
This would equal taxable Income.

If they give you taxable income and you need to find financial accounting income, you would do it backward.

In this question, we have $600,000 of financial income and we need to find taxable income. So we follow what I gave you above.

Start with the $600,000
Deduct: Income Exempt $(60,000) because it is included in the $600,000, but will not be included in taxable income.
Deduct: Depreciation expense that exceeded the book depreciation $(120,000). If the expense was HIGHER for taxable income, then taxable income is LOWER than financial accounting income. Therefore, we need to subtract the $120,000.
Deduct: Life insurance proceeds $(100,000). They are tax exempt like the bonds. That $100,000 was included in the $600,000, but will not be included in taxable income.

Therefore, taxable income is $320,000.  This question is asking for current income tax liability. This is the taxable income of $320,000 times the current tax rate of 30%, which equals $96,000.
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