Hi Patel,

Here is the explanation for your que. Hope its helpful to you.

First, we need to calculate taxable income, always start with book income ( unless and otherwise they given to you ) and adjust for other tem... and per... differenceses.

Book income               600,000

-tax-exempt bond         60,000

-excess depreciation    120,000

-proceeds of insurance 100,000

TAXABLE INCOME           320,000

So, tax payable ( liability )= 320,000*30% = 96,000.

hey Patel,

we always start with NI on Financial stat's and then reconcile it for tax purposes.So we start with Fin'Book in come :

Fin.Book Income                                         600,000

(-) Income from mun.Bonds        &nb sp;         &nb sp;    (60,000)

(-)tax deprn in excess of book Deprn         & nbsp; (120,000)

(-)Term life Insurance proceeds        &nbs p;        (100,000)

we get taxable income                               320,000.

And apply tax rate of 30%to get 96,000 current tax liability.

u will ask why I deducted all amounts from book Income.

IF you read carefully, you will come across various situations where book income will be different than tax income.Some are temporary and some are permanent.

- Income from Municipal bonds are permanent difference and never taxed.So deduct that amount from 600,000 because we added it to arrive in NI for current year prepared according to GAAP.

- Double decling depreciation in excess of book depreciation is also subtracted.DDB is taken by applied by companies to get register extra expense for beginning lives of the asset.So income goes down and so is u r liability for tax.But in later years this depreciation will be less than tax and your Income will be more..

- Proceeds of life insurance are also tax deductible..so deduct it..and you will arrive at 320,000 taxable income....and then apply 30% to arrive at 96,000

Hope, this helps!!.

Thanx a lot oh007 and meghna...:)

Actually I just got confused between the working they showed in becker text page F6-40 (which is similar example to this question.....) wherein they add n less permanent difference to income statement.

Really appreciate yr help!!