Oakland Corporation reported a net operating loss of $500,000 in year 1.Not included in the year 1 taxable income computation was a disallowed entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on an installment sale of $250,000.The corporation's current earnings and profits for year 1 would be:
A)$(500,000).
B)$(720,000).
C)$(510,000).
D)$(260,000).

Question

Quizplus · Accepted Answer

The corporation's current earnings and profits for year 1 would be calculated by adjusting the net operating loss with the items not included in the taxable income computation. Starting with the net operating loss of $500,000, add back the disallowed entertainment expense of $20,000, since this expense reduces taxable income but not earnings and profits. The tax-exempt income of $10,000 does not affect earnings and profits since it's already excluded from taxable income. The deferred gain on an installment sale of $250,000 should be included in earnings and profits when realized. Therefore, the calculation is $500,000 (loss) + $20,000 (disallowed expense) + $250,000 (deferred gain) = $(260,000).

Oakland Corporation Reported a Net Operating Loss of $500,000 in Year