"1. Mega Corporation had $5,000,000 in income before tax, based on the extendedtrial balance. You were provided the additional information. Included in thebook income was $1,000,000 in life insurance proceeds from the death of anofficer; the book income included $3,000,000 in undistributed income from itsforeign subsidiaries; tax depreciation was $2,500,000 (double-decliningbalance) and book depreciation was $2,000,000 (straight-line); tax amortizationof intangibles was $400,000, but the intangibles were not impaired; $150,000dividends from a 5% owned domestic corporation was included in book income;a $400,000 capital loss from the sale of the domestic corporation stock wasdeducted from book income; $100,000 in charitable contributions was deductedin arriving at book income; the company has a $1,000,000 net operating losscarryforward from the previous year.a. Prepare a schedule and compute the corporation’s taxable incomeSolutionIncome before Tax$5,000,000Lesss: Life insurance proceeds belonging to an officer $1,000,000 Less: Undistributed income from subsidiaries $3,000,000 Less: Book depreciation $2,000,000 Less: Divided income from 5% owned domestic $150,000 companyTotal $6,150,000 -1,150,000ADD: Tax Depriciation $2,500,000 Add Unimpaired amortization $400,000 Add Capital Loss $400,000 Add Charitable contribution deducted while calculating $100,000incomeAdd Operating loss carried forward from last year $1,000,000 TOTAL4,400,000CORPORATION TAXABLE INCOME3,250,000b. Compute the corporation’s tax expense (assume a 40% tax rate).CORPORATION TAXABLE INCOME3,250,000TAX EXPENSE @40%1,300,000c. Compute the corporation’s income tax payable (assume a 40% tax rate).Income before Tax$5,000,000Lesss: Life insurance proceeds belonging to an officer $1,000,000 Less: Book depriciation considered seperately $2,000,000 Total $3,000,000 2,000,000ADD: Tax Depriciation $2,500,000 Add Unimpaired amortization $400,000 TOTAL2,900,000CORRPORATION TAXABLE INCOME4,900,000INCOME TAX PAYABLE1,960,000d. Compute the corporation’s effective tax rate.Income before Tax$5,000,000Income tax payable$1,960,000Effective rate of tax39.2% e. Compute the corporation’s change in earnings and profits for the year. Last year Current yearprofit -1,000,000 4,900,000Change in profit=5,900,000 "