Unit 9 assignment tax | Accounting homework help

C:3-66

Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. The corporation uses the calendar year and accrual basis for both book and tax purposes. It is engaged in the sale of musical instruments with an employer identification number (EIN) of XX-2015013. The company incorporated on December 31, 2009, and began business on January 2, 2010. Table C:3-4 contains balance sheet information at January 1, 2013, and December 31, 2013. Table C:3-5 presents an income statement for 2013. These schedules are presented on a book basis. Other information follows the tables.

Estimated Tax Payments (Form 2220):

The corporation deposited estimated tax payments as follows:

April 15, 2013

$120,000

June 17, 2013

241,000

September 16, 2013

290,000

December 16, 2013

290,000

Total

$941,000

Some dates are the 16th or 17th because the 15th falls on a weekend or holiday. Taxable income in 2012 was $1.2 million, and the 2012 tax was $408,000. The corporation earned its 2013 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods.

TABLE C:3-4 Melodic Musical Sales, Inc.—Book Balance Sheet Information

 

January 1, 2013

December 31, 2013

Account

Debit

Credit

Debit

Credit

Cash

$  125,614

 

$  289,607

 

Accounts receivable

455,112

 

529,200

 

Allowance for doubtful accounts

 

$    22,756

 

$    26,460

Inventory

2,450,000

 

3,430,000

 

Investment in corporate stock

370,000

 

50,000

 

Investment in municipal bonds

32,000

 

32,000

 

Net current deferred tax asset

12,837

 

8,996

 

Cash surrender value of insurance policy

42,000

 

57,000

 

Land

300,000

 

300,000

 

Buildings

2,000,000

 

2,000,000

 

Accumulated depreciation—Buildings

 

100,000

 

140,000

Equipment

900,000

 

2,800,000

 

Accumulated depreciation—Equipment

 

150,000

 

250,000

Trucks

280,000

 

280,000

 

Accumulated depreciation—Trucks

 

84,000

 

140,000

Accounts payable

 

340,000

 

306,000

Notes payable (short-term)

 

650,000

 

520,000

Accrued payroll taxes

 

14,700

 

18,375

Accrued state income taxes

 

8,820

 

14,700

Accrued federal income taxes

 

 

 

127,584

Bonds payable (long-term)

 

2,500,000

 

3,000,000

Net noncurrent deferred tax liability

 

157,287

 

219,711

Capital stock—Common

 

980,000

 

980,000

Retain earnings—unappropriated

 

1,960,000

 

4,033,973

Totals

$6,967,563

$6,967,563

$9,776,803

$9,776,803

Inventory and Cost of Goods Sold (Form 1125-A):

The corporation uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected on Form 1125-A. No other costs or expenses are allocated to cost of goods sold. Note: the corporation is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous three years was less than $10 million.

Line 9 (a)

Check (ii)

            (b), (c) & (d)

Not applicable

            (e) & (f)

No

Compensation of Officers (Form 1125-E):

(a)

(b)

(c)

(d)

(f)

Mary Travis

XXX-XX-XXXX

100%

50%

$287,000

John Willis

XXX-XX-XXXX

100%

25%

 175,000

Chris Parker

XXX-XX-XXXX

100%

25%

 175,000

Total

 

$637,000

Bad Debts:

For tax purposes, the corporation uses the direct writeoff method of deducting bad debts. For book purposes, the corporation uses an allowance for doubtful accounts. During 2013, the corporation charged $39,200 to the allowance account, such amount representing actual writeoffs for 2013.

TABLE C:3-5 Melodic Musical Sales, Inc.—Book Income Statement 2013

Sales

 

$  9,800,000

Returns

 

(245,000)

Net sales

 

$  9,555,000

Beginning inventory

$2,450,000

 

Purchases

5,390,000

 

Ending inventory

(3,430,000)

 

Cost of goods sold

 

(4,410,000)

Gross profit

 

$ 5,145,000

Expenses:

 

 

   Amortization

$          –0–

 

   Depreciation

256,000

 

   Repairs

20,384

 

   General ins.

53,900

 

   Net premium-Off. life ins.

44,100

 

   Officer’s compensation

637,000

 

   Other salaries

392,000

 

   Utilities

70,560

 

   Advertising

47,040

 

   Legal and accounting fees

49,000

 

   Charitable contributions

29,400

 

   Payroll taxes

61,250

 

   Interest expense

205,800

 

   Bad debt expense

42,904

 

Total expenses

 

(1,909,338)

Gain on sale of equipment

 

80,000

Interest on municipal bonds

 

4,900

Net gain on stock sales

 

48,000

Dividend income

 

11,760

Net income before income taxes

 

$ 3,380,322

Federal income tax expense

 

(1,134,849)

State income tax expense

 

(73,500)

Net income

 

$ 2,171,973

Additional Information (Schedule K):

1 b

Accrual

2 a

451140

 b

Retail sales

 c

Musical instruments

No

4 a

No

 b

Yes; omit Schedule G

5 a

No

 b

No

6-7

No

 8

Do not check box

 9

Fill in the correct amount

10

3

11

Do not check box

12

Not applicable

13–14

No

15a

No

  b

Not applicable

16–18

No

Organizational Expenditures:

The corporation incurred $14,000 of organizational expenditures on January 2, 2009. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2010 and amortize the remaining $9,000 amount over 180 months, with a full month’s amortization taken for January 2010. The corporation reports this amortization in Part VI of Form 4562 and includes it in “Other Deductions” on Form 1120, Line 26.

Capital Gains and Losses:

The corporation sold 100 shares of PDQ Corp. common stock on October 8, 2013, for $200,000. The corporation acquired the stock on December 15, 2012, for $140,000. The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2013, for $168,000. The corporation acquired this stock on September 18, 2011, for $180,000. The corporation has an $8,000 capital loss carryover from 2011.

Fixed Assets and Depreciation:

For book purposes: The corporation uses straight-line depreciation over the useful lives of assets as follows: Store building, 50 years; Equipment, 15 years (old) and ten years (new); and Trucks, five years. The corporation takes a half-year’s depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements in Tables C:3-4 and C:3-5 reflect these calculations.

For tax purposes: All assets are MACRS property as follows: Store building, 39-year nonresidential real property; equipment, seven-year property; and trucks, five-year property. The corporation acquired the store building for $2 million and placed it in service on January 2, 2010. The corporation acquired two pieces of equipment for $300,000 (Equipment 1) and $600,000 (Equipment 2) and placed them in service on January 2, 2010. The corporation acquired the trucks for $280,000 and placed them in service on July 18, 2011. The trucks are not listed property and are not subject to the limitation on luxury automobiles. The corporation did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2013. Accumulated tax depreciation through December 31, 2012, on these properties is as follows:

Store building

$ 151,780

Equipment 1

   168,810

Equipment 2

   337,620

Trucks

   145,600

On October 16, 2013, the corporation sold for $320,000 Equipment 1 that originally cost 300,000 on January 2, 2010. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2013, the corporation acquired and placed in service a piece of equipment costing $2.2 million. Assume these two transactions do not qualify as a like-kind exchange under Reg. Sec. 1.1031(k)-1(a). The new equipment is seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment but elected out of bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2013 depreciation (reproduced in Appendix C of this text).

Other Information:

  • The corporation’s activities do not qualify for the U.S. production activities deduction.
  • Ignore the AMT and accumulated earnings tax.
  • The corporation received dividends (see Income Statement in Table C:3-5) from taxable, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20%.
  • The corporation paid $98,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.
  • The state income tax in Table C:3-5 is the exact amount of such taxes incurred during the year.
  • The corporation is not entitled any credits.
  • Ignore the financial statement impact of any underpayment penalties incurred on the tax return.

Required: Prepare the 2013 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules.

Optional: Prepare both Schedule M-3 (but omit Schedule B) and Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3.

Note to Instructor: See solution in the Instructor’s Guide for other optional information to provide to students.

C:3-67

Permtemp Corporation formed in 2012 and, for that year, reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:

Sales

 

$20,000,000

Cost of goods sold

 

(15,000,000)

Gross profit

 

$   5,000,000

Dividend income

 

         50,000

Tax-exempt interest income

 

        15,000

Total income

 

$ 5,065,000

Expenses:

 

 

   Depreciation

$     800,000

 

   Bad debts

      400,000

 

   Charitable contributions

      100,000

 

   Interest

      475,000

 

   Meals and entertainment

      45,000

 

   Other

 3,855,000

 

Total expenses

 

(5,675,000)

Net loss before federal income taxes

 

$ (610,000)

Cash

 

$   500,000

Accounts receivable

$ 2,000,000

 

Allowance for doubtful accounts

   (250,000)

 1,750,000

Inventory

 

 4,000,000

Fixed assets

$10,000,000

 

Accumulated depreciation

  (800,000)

 9,200,000

Investment in corporate stock

 

 1,000,000

Investment in tax-exempt bonds

 

      50,000

Total assets

 

$16,500,000

Accounts payable

 

$2,610,000

Long-term debt

 

  8,500,000

Common stock

 

  6,000,000

Retained earnings

 

   (610,000)

Total liabilities and equity

 

$16,500,000

Additional information for 2012:

  • The investment in corporate stock is comprised of less-than-20%-owned corporations.
  • Depreciation for tax purposes is $1.4 million under MACRS.
  • Bad debt expense for tax purposes is $150,000 under the direct writeoff method.
  • Limitations to charitable contribution deductions and meals and entertainment expenses must be tested and applied if necessary.
  • Qualified production activities income is zero.

Required for 2012:

  • a. Prepare page 1 of the 2012 Form 1120, computing the corporation’s NOL.
  • b. Determine the corporation’s deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting under ASC 740. Use the balance sheet information to prepare Schedule L of the 2012 Form 1120.
  • c. Prepare the 2012 Schedule M-3 for Form 1120.
  • d. Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory 34% tax rate.

Note: For 2012 forms, go to forms and publications, previous years, at the IRS website, www.irs.gov.

For 2013, Permtemp reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:

Sales

 

$33,000,000

Cost of goods sold

 

(22,000,000)

Gross profit

 

$11,000,000

Dividend income

 

55,000

Tax-exempt interest income

 

15,000

Total income

 

$11,070,000

Expenses:

 

 

   Depreciation

$    800,000

 

   Bad debts

625,000

 

   Charitable contributions

40,000

 

   Interest

455,000

 

   Meals and entertainment

60,000

 

   Other

4,675,000

 

Total expenses

 

(6,655,000)

Net income before federal income taxes

 

$ 4,415,000

Cash

 

$ 2,125,000

Accounts receivable

$ 3,300,000

 

Allowance for doubtful accounts

(450,000)

2,850,000

Inventory

 

6,000,000

Fixed assets

$10,000,000

 

Accumulated depreciation

(1,600,000)

8,400,000

Investment in corporate stock

 

1,000,000

Investment in tax-exempt bonds

 

50,000

Total assets

 

$20,425,000

Accounts payable

 

$ 2,120,000

Long-term debt

 

8,500,000

Common stock

 

6,000,000

Retained earnings

 

3,805,000

 

 

$20,425,000

Additional information for 2013:

  • Depreciation for tax purposes is $2.45 million under MACRS.
  • Bad debt expense for tax purposes is $425,000 under the direct writeoff method.
  • Qualified production activities income is $3 million.

Required for 2013:

  • a. Prepare page 1 of the 2013 Form 1120, computing the corporation’s taxable income and tax liability.
  • b. Determine the corporation’s deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting ASC 740. Use the balance sheet information to prepare Schedule L of the 2013 Form 1120.
  • c. Prepare the 2013 Schedule M-3 for Form 1120.
  • d. Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory 34% tax rate.