Choice "b" is correct. The Schedule M-1 reports the reconciliation of income (loss) per books to income (loss) per the tax return [Note: It reports both permanent and temporary differences that are discussed in the Financial textbook for deferred taxes.]. Items that are included on this schedule are those that are (1) reported as income for book purposes but not for tax purposes; (2) reported as an expense for book purposes but not for tax purposes; (3) reported as taxable income for tax purposes but not as income for book purposes; and (4) reported as deductible for tax purposes but not as an expense for book purposes. The only option above that falls into one of these four categories is option b. Premiums paid on a key-person life insurance policy are proper GAAP expenses for book purposes, but they are not allowable deductions for tax purposes.

Choice "c" is incorrect. Cash distributions to shareholders are not reported on the income statement for book purposes and are not deductible for tax purposes. They do not enter into the calculation of income in either case and are not reported on the Schedule M-1. Cash distributions actually are reported on Schedule M-2, which is a reconciliation of unappropriated retained earnings.

Choice "d" is incorrect. Corporate bond interest is not reported differently for GAAP and tax purposes. It is included as income for GAAP purposes and for tax purposes. Therefore, no reconciliation of book income to taxable income is required for this item.

Choice "a" is incorrect. The ending balance of retained earnings is not reported on a GAAP income statement, nor is it included as part of taxable income. Therefore, it is not part of the Schedule M-1. Unappropriated retained earnings are reconciled on Schedule M-2 of the Form 1120.