Respuesta :
Answer: a. $258,000
Explanation:
The organization expense ($8,000) is a capital expense and therefore is an enduring benefit for the organization. Capital expenditure is added back while calculating the E & P. Moreover, any organizational cost are treated as capital expenditure and these costs are written off in the E & P only when the organization is not anymore a going concern.
Going Concern is an assumption whereby an organization will continue to operate indefinitely.
Answer:
A. 258,000
Explanation:
- Falcon Corporaton's taxable income for its first year of operation= $250,000
- Formation Expenses fo Falcon Corporaton = $50,000
- Deduction claimed by Falcon as Organisational expenses= $8,000
- Falcon's Current Earnings and Profit therefore is the addition of the Current taxable income and the deduction claimed as organisational expense
- = $250,000 + $8,000= $258,000
Note: The reason why Falcon was able to deduct the $8,000 in the initial calculation of its taxable income for the year is that the Internal Revenue Service allows a Start-up Corporatio to deduct $5,000 in business startup costs and $5,000 in organizational costs only if the formation expenses or start-up cost is $50,000 or less. This exemption is removed once the expense is over $50,000.
Since, Falcon only incurred $50,000 as organisational expense during formation, the $8,000 is still within the limits of $10,000 allowed by the IRS.
However, The calculation of a firm's Earning and Profit represents a corporation's economic ability to pay dividends to its shareholders and it helps determine whether this dividend is taxable or not.
In calculating the E and P therefore, the claimed deduction from organisational expense must be added back to the taxable income. That is why Falcon's current Earnings and Profit is $258,000
