Grim Corporation has income and expenses for its fiscal year ended April 30, 2013, recorded under generally accepted accounting principles, as shown in the schedule below. In addition, a review of Grim’s books and records reveals the following information: • Grim expensed, for book purposes, meals and entertainment costs totaling $100,000. These costs were incurred by Grim sales personnel, are reasonable in amount, and are documented in company records.

• During January 2013, Grim was sued by one of its employees as a result of a work-related accident. The suit has not yet gone to court. However, Grim’s auditors required the company to record a contingent liability (and related book expense) for $50,000, reflecting the company’s likely liability from the suit.

• Grim recorded federal income tax expense for book purposes of $130,000.

• Grim uses the reserve method for calculating bad debt expenses for book purposes. Its 2013 book income statement reflects bad debt expense of $30,000, calculated as 1.5 percent of sales revenue. Actual write-offs of accounts receivable during 2013 totaled $22,000. 

• MACRS depreciation for the year totals $95,000.

a. Complete the table shown below, reflecting Grim’s book/tax differences for the current year, whether such differences are positive (increase taxable income) or negative (decrease taxable income), and the final numbers to be included in the calculation of taxable income on Grim’s tax return.

GAAP

Book/Tax

Taxable

Book Income

Differences

Income

Sales revenue

$ 2,000,000

Cost of goods sold

(1,200,000)

Net profit

$ 800,000

Meals and entertainment expense

(100,000)

Bad debt expense

(30,000)

Depreciation expense

(80,000)

Other operating expenses

(220,000)

Contingent loss

(50,000)

Income before taxes

$ 320,000

Federal income tax expense

(130,000)

Net income

$ 190,000

b. Prepare a Schedule M-1, page 5, Form 1120, reconciling Grim’s book and taxable income.