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Simon and Theodore are father and son and have each been operating reasonably successful businesses

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simon and Theodore are father and son and have each been operating reasonably successful

 

businesses independent of each other. They have recently concluded that their individual

 

strengths would be more successful if they combined their businesses together and have been

 

formulating a plan to bring their businesses together as a single entity. They have been operating

 

their businesses as separate sole proprietorships but now want to both put them together and

 

obtain some legal liability protection.

 

Alvin is Theodores best friend since grade school. Alvin would like to participate in the new

 

business venture but has limited cash to contribute. He has offered to do all the start up

 

accounting and legal work in exchange for a portion of the new business. Even though Simon is

 

not sure about Alvins work ethic, he agrees to let Alvin become part of the new business.

 

The assets and liabilities they each contribute are included in the excel spreadsheet under the tab

 

Assets Contributed.

 

On February 1, 2012, the contributions are finally completed and all of the legal agreements

 

signed by all of the parties. Simon contributed his existing business, with the exception of the

 

land and building he owns where the business will be operated. Theodore contributed all of his

 

business assets and liabilities. Alvin contributed a little bit of cash and his services prior to the

 

final contributions which were valued at $75,000. The new entity was formed in January 2012 in

 

anticipation of the contributions by each party.

 

As it turns out, at least looking at the trial balance included in the excel spreadsheet (tab Trial

 

Balance), the combining of the two businesses has resulted in increased sales and profits and the

 

new business entity is very successful.

 

Alvin turns out to be a pretty good financial accountant and has completed the trial balance as of

 

the end of the year. You have had a number of discussions with Alvin and have found out the

 

following information about the new business. The name of the company is AST Records. The

 

business is manufacturing vinyl records for various recording artists. As a part of the business,

 

the company not only manufactures the vinyl albums but also does the art work for the album

 

cover. Alvin has chosen the accrual method for book purposes and sees no reason why the tax

 

returns should be anything different. Inventory is a significant part of the revenue production

 

process. Since the entity was just formed at the beginning of the year, there were no reserves or

 

other accruals as of the start date of February 1, 2012. Because the company has turned out to be

 

more successful than they ever planned, there is a significant amount of cash on the balance

 

sheet at the end of the year. Simon has taken some of the extra cash and made investments in

 

various stocks (other than DaveCo, all are less than 20% ownership of the stock investment) and

 

bonds to provide at least some interest and dividend income. All of the investments are

 

presented at fair market value using the Available for Sale accounting method. Alvin knew

 

 

enough about this method that he correctly included the increase in value from original cost in

 

the Other Comprehensive Income account (but did not do so net of tax which you can safely

 

ignore for purposes of this exam).

 

During the year, some of the equipment contributed by Simon was sold for a book loss.

 

Additionally, Simon sold some investments for gains and losses. All of the necessary details are

 

included on tabs Fixed Asset Sales and Sale of Investments.

 

In August, Simons friend Dave approached Simon with an idea for a related business. Dave

 

thought opening a recording studio for local bands would fit well with the existing vinyl record

 

business and proposed a new venture. Simon was initially skeptical but agreed to form a new

 

corporate subsidiary of AST Records along with Dave. AST contributed $450,000 in cash to the

 

new entity in exchange for 45% of the common stock of the new company called DaveCo.

 

Dave contributed some assets and his services for the remaining 55% interest. Alvin knows that

 

if you own between 20% and 50% of a business, then you account for it using the Equity Method

 

for GAAP, but he has no idea what you do for tax purposes. The details on DaveCo are included

 

on tab DaveCo Rollforward. You do NOT need to worry about the formation of DaveCo as

 

that is not part of this exam.

 

As mentioned earlier, Simon retained ownership of the land and building where AST Records is

 

located. AST pays Simon monthly rent of $9,000 that is payable on the first of each month for

 

the PRECEEDING month.

 

Alvin, Simon, and Theodore are all employees of AST Records as well as owners. Simon made

 

a choice early on that all employees would be paid once per month on the 1st of each month for

 

the past months work. This was so he would never pay anyone in advance for work they had

 

not yet done. AST Records has four employees in addition to Alvin, Simon and Theodore, all of

 

whom have been with the company since February 1, 2012. None of the accrued vacation

 

balance at the end of the year was paid within 2 months of year end.

 

During the year, the company needed some new fixed assets. Details of the acquisition dates and

 

book depreciation calculations are included on the tab Book Depreciation.

 

Here are some details to help you finish the forms (do not get caught up in googling things such

 

as whether I have the proper zip code, etc. that just wastes your time):

 

AST Records

 

1234 Album Drive

 

Las Vegas, NV 80024

 

Simon and Theodore live together at

 

4567 Chipmunk Lane

 

Las Vegas, NV 80024

 

Alvin lives at

 

 

9876 Burbank Road

 

Las Vegas, NV 80025

 

Below are the Social Security numbers for each of the owners:

 

Simon

 

Theodore

 

Alvin

 

 

555-55-5556

 

333-33-3334

 

111-11-1112

 

 

For any tax calculation, use a flat rate of 34%. Do not use the graduated rates.

 

Paper#38128 | Written in 07-Dec-2015

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