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Prentice Halls Federal Taxation 2010: Corporations...




Prentice Halls Federal Taxation 2010: Corporations, Partnerships, Estates and Trusts, 23e ISBN: 9780136112020 C:3-64 TAX FORM/RETURN PREPARATION PROBLEM Knoxville Musical Sales, Inc. is located at 5500 Kingston Pike, Knoxville, TN 37919. 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 75-2010008. The company incorporated on December 31, 2004, and began business on January 2, 2005. Table C:3-3 contains balance sheet information at January 1, 2008, and December 31, 2008. Table C:3-4 presents an income statement for 2008. These schedules are presented on a book basis. Other information follows. Estimated Tax Payments (Form 2220): The corporation deposited estimated tax payments as follows: April 15, 2008 $105,000 June 16, 2008 (June 15 fell on a Sunday) 216,000 September 15, 2008 253,000 December 15, 2008 253,000 Total 827,000 Taxable income in 2007 was $1,700,000, and the 2007 tax was $578,000. The corporation earned its 2008 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods. Inventory and Cost of Goods Sold (Schedule 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 in Schedule 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. Knoxville Musical Sales, Inc.?Book Balance Sheet Information January 1, 2008 December 31, 2007 Account Debit Credit Debit Credit Cash $ 67,244 $ 99,845 Accounts receivable 427,248 496,800 Allowance for doubtful accounts $ 36,316 $ 42,228 Inventory 2,300,000 3,220,000 Investment in corporate stock 180,000 65,000 Investment in municipal bonds 30,000 30,000 Cash surrender value of insurance policy 20,000 34,000 Buildings 1,800,000 1,800,000 Accumulated depreciation?Buildings 90,000 126,000 Equipment 1,050,000 1,580,000 Accumulated depreciation?Equipment 175,000 207,333 Trucks 240,000 240,000 Accumulated depreciation?Trucks 72,000 120,000 Land 500,000 500,000 Deferred tax asset 15,305 14,732 Accounts payable 1,000,000 600,000 Notes payable (short-term) 500,000 400,000 Accrued payroll taxes 13,800 17,250 Accrued state income taxes 7,500 12,200 Accrued federal income taxes 112,449 Bonds payable (long-term) 1,800,000 1,400,000 Deferred tax liability 175,181 312,560 Capital stock?Common 920,000 920,000 Retain earnings?Unappropriated Totals $6,629,797 $6,629,797 $8,080,377 $8,080,377 1,840,000 3,810,357 Line 9 (a) Check (ii) (b), (c) & (d) Not applicable (e) & (f) No Compensation of Officers (Schedule E): Mary Travis 345-82-7091 100% 50% $270,000 John Willis 783-97-9105 100% 25% 164,000 Chris Parker 465-34-2245 100% 25% Total 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 2008, the corporation charged $36,800 to the allowance account, such amount representing actual write-offs for 2008. Additional Information (Schedule K): 1 b Accrual 6-7 No 2 a 451140 8 Do not check box b Retail sales 9 Fill in the correct amount c Musical instruments 10 3 3-4 No 11 Do not check box 5 Yes 12 Not applicable 13 No Sales $ 9,200,000 Returns (230,000) Net sales $ 8,970,000 Beginning inventory $2,300,000 Purchases 5,060,000 Ending inventory (3,220,000) Cost of goods sold (4,140,000) Gross profit $ 4,830,000 Expenses: Amortization $ ?0? Depreciation 186,333 Repairs 19,136 General insurance 50,600 Net premium-Officers? life insurance 41,400 Officer?s compensation 598,000 Other salaries 368,000 Utilities 66,240 Advertising 44,160 Legal and accounting fees 46,000 Charitable contributions 27,600 Payroll tax 57,500 Interest expense 193,200 Bad debt expense 47,712 Total expenses (1,740,881) Gain on sale of equipment 120,000 Interest on municipal bonds 4,600 Dividend income 11,040 Net loss on stock sales (16,000) Net income before income taxes $ 3,208,759 Federal income tax expense (1,077,402) State income tax expense (69,000) Net income $ 2,062,357 Organizational Expenditures: The corporation incurred $6,500 of organizational expenditures on January 2, 2005. For book purposes, the corporation expensed the entire expenditure pursuant to Statement of Position 98-5. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2005 and amortize the remaining $1,500 amount over 180 months, with a full month?s amortization taken for January 2005. 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 March 7, 2008, for $55,000. The corporation acquired the stock on December 15, 2007, for $65,000. The corporation also sold 75 shares of JSB Corp. common stock on September 17, 2008, for $44,000. The corporation acquired this stock on September 18, 2005, for $50,000. The corporation has a $7,500 capital loss carryover from 2007. 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:3-3 and C:3-4 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 $1.8 million and placed it in service on January 2, 2005. The corporation acquired two pieces of equipment for $350,000 (Equipment 1) and $700,000 (Equipment 2) and placed them in service on January 2, 2005. The corporation acquired the trucks for $240,000 and placed them in service on July 18, 2006. The corporation did not make the expensing election under Sec. 179 on any property acquired before 2008. Accumulated tax depreciation through December 31, 2007, on these properties is as follows: Store building $136,602 Equipment 1 196,945 Equipment 2 393,890 Trucks 124,880 On November 16, 2008, the corporation sold for $400,000 Equipment 1 that originally cost $350,000 on January 2, 2005. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on November 17, 2008, the corporation acquired and placed in service a piece of equipment costing $880,000. 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 and claimed bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2008 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:3-4) from taxable, domestic corporations, the stock of which Knoxville Musical Sales, Inc. owns less than 20%. ? The corporation paid $92,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings. ? The state income tax in Table C:3-4 is the exact amount of such taxes incurred during the year. ? The corporation is not entitled any credits. Required: Prepare the 2008 corporate tax return for Knoxville Musical Sales, Inc. along with any necessary supporting schedules. Optional: Prepare Schedule M-3 (and Schedule B) as well as Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3.


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