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
|
3
|
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.