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The Falcon Machinery Corp., 271 East Beaumont Street FORM 1120 ? U.S. CORPORATION INCOME TAX RETURN

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Question;FORM 1120 ? U.S. CORPORATION INCOME TAX RETURNThe Falcon Machinery Corp., 271 East Beaumont Street, Chicago, Illinois 60612, keeps its books on the calendar-year, accrual basis. It is engaged in the manufacture of of?ce supplies, and its business activity code is 339900. Its employer identi?cation number is 35-0816302, and it was incorporated on July 1, 1998. At no time during 2011 did any foreign or domestic corporation, partnership (including any entity treated as a partnership), or trust own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporation?s stock entitled to vote. Also, Falcon Machinery did not have an interest in a foreign bank, securities or?nancial account and was not the grantor of, or the transferor to, a foreign trust. This corporation is not a personal holdingcompany or a member of a group of controlled corporations.The following is the corporation?s trial balance per books as of the close of the year 2011 (additional information on speci?c accounts follows the trial balance):TRIAL BALANCEDECEMBER 31, 2011AccountCash.............................Accounts receivable....................Note receivable.......................Inventories (closing)....................Corporate bonds 1.....................Unamortized bond premium 2...........State and municipal bonds..............U.S. Treasury bondsStock:...............................Domestic corporations 1..............Foreign corporations 1................Land................................Buildings.............................Machinery and equipment..............Of?ce furniture........................Trucks...............................Accumulated depreciationPrepaid insuranceSinking fund?Bond retirement 2Goodwill2.............................Cash surrender value - Officers? life insurance 2...Unamortized bond issue expense 2.......Accounts payable......................Notes payable (short term)Accrued interest.......................Accrued payroll........................Accrued vacation pay...................Accrued taxes:........................IL Replacement tax..................IL Franchise tax.....................IL Income tax.......................Federal Income taxForeign taxes.......................Property taxes......................Employment taxes...................Bonds payable (long term)Capital stock:.........................7% Preferred.......................Common...........................Surplus?PaidUnappropriated retained earnings........Treasury stock........................* Appropriated retained earnings 16......Dividends paid:Common stock......................Preferred stock......................1Dr.158,98561,15911,100333,89422,4001,26515,00048,000Sales................................Returns and allowances................Purchases (net).......................Inventory variation (decrease) 4..........Factory wages........................Costs attributable to inventory 5..........Depreciation6.........................Advertising...........................Bad debts............................Of?cers? life insurance premiums(net of CSV adjustment)..............Of?ce salaries 7.......................Salesmen?s compensation 7.............Of?cers? compensation 8................Pensions.............................Utilities9..............................Service guarantees 9...................Of?ce supplies and expense 9...........Amortized bond issue expense 9Interest expense......................Legal and accounting fees 9Travel expense 9.......................Health plan costs......................Taxes:...............................IL Replacement tax..................IL Franchise tax.....................IL Income tax.......................Federal Income taxForeign taxes.......................Property taxes......................Employment taxes...................Interest income:Corporate bonds 10.............State and municipal bondsU.S. Treasury bonds..................Notes receivableTrade accounts......................Dividends received 11...................Amortized bond premium 10Storage rental incomeSale of scrapSecurities sales (net) 12Real estate and equipment sales 13Worthless stocks 12....................Fire loss 14...........................Contributions 15.......................Bonds and stock: Corporate bonds and foreign and domestic stocks are entered at Line 9 of Schedule L.Sinking fund, Goodwill, Cash surrender value of of?cers? life insurance, Unamortized bond premium, Unamortized bond issue expense: All these asset accounts should be aggregated at Line 14 on the balance sheet, Schedule L, as ?other assets.?3 Accrued taxes, Income (federal): The federal income tax for 2011, as determined on Line 31 of Form 1120, should be included in the item ?Other current liabilities? on page 5, Schedule L, Line 18(d) of the balance sheet to the extent not paidas of December 31, 2011, and in full on Line 2 of Schedule M-1. Assume that the Federal estimated taxes of $60,000 were paid in equal installments by the due dates. The 2010 tax liability was $38,750.4 Inventory variations: This?gure represents the difference between the aggregate inventories at the beginning and the end of the tax year, as part of the cost of goods sold. (This?gure would not be entered on Form 1120, it is solely a book?gure.) Falcon used the lower of cost or market method for the valuation of inventory. There was no change in this method from previous years.5 Costs attributable to inventory: Costs attributable to inventory are the indirect UNICAP costs reported on line 5 of Form 1125-A. For Falcon, these costs include a portion ($8,444) of the of?cers? salaries. Falcon?s total indirect costs are $424,441, as shown on the trial balance sheet for 2011. None of these indirect costs are included in the amount of expenses listed elsewhere on the trial balance sheet.6 Depreciation: The Falcon Machinery Corporation purchased machinery (7-year recovery property) in August 2011 at a cost of $300,000. Falcon claimed $150,000 Code Sec. 179 expense deduction and depreciates the remaining basis using MACRS straight-line with a 7-year recovery period. The rate for the current year is 7.14%. Falcon elected not to claim bonus depreciation.Construction of a factory building (39-year recovery property) was completed during June 2011 at a cost of $250,000 and depreciated under the MACRS straight-line method. The rate for the current year is 1.391%. This building was constructed on land that was purchased for $8,000.For machinery (7-year recovery property) purchased in July 2010 at a cost of $134,892, the company uses the regular MACRS method and a 7-year recovery period. Depreciation for 2010 used a rate of 14.29%, while the 2011 rate is 24.49%. Neither bonus depreciation nor a Code Sec. 179 deduction was elected.For of?ce furniture and?xtures (7-year property) purchased in April 2009 at a cost of $30,629, the company uses the regular MACRS method and a 7-year recovery period. Depreciation for 2009 and 2010 used rates of 14.29% and 24.49%, respectively, while the 2011 rate is 17.49%. Based on projected future earnings, Falcon decides to elect out of claiming both bonus depreciation and Code Sec. 179 expense deductions.For a truck (5-year recovery property that is not subject to Code Sec. 280F) purchased in 2010 at a cost of $45,264, the company uses the regular MACRS method and a 5-year recovery period. Depreciation for 2010 used a rate of 20%. The 2011 depreciation rate is 32%. Neither bonus depreciation nor a Code Sec. 179 deduction was elected.A shed placed in service on January 2, 2001 was destroyed by?re in February 2011. The MACRS deduction claimed in previous years is $2,554, and the full-year depreciation for 2011 is $256. The property cost $10,000, and there is no insurance recovery. The total cost of the original factory buildings placed in service in 1998 was $420,500. Accumulated depreciation on these buildings is $139,728.7 Of?ce salaries, Salesmen?s compensation: The aggregate of these two items should be entered at Line 13, page 1 of Form 1120.8 Of?cers? compensation: Compensation of $54,000 was paid to the president, F.L. Davis (social security number 252-678315). He owned 15 percent of the common stock. Compensation of $41,500 was paid to the vice-president, B.L. West (social security number 296-40-7222), who owned 10 percent of the common stock. Compensation of $38,944 was paid to the secretary-treasurer, T.N. Dorst (social security number 307-31-3433), who owned 10 percent of the common stock. All threeworked full time for the corporation. As noted above, $8,444 of the salaries paid to the of?cers consists of costs attributable to inventory. Note: Form 1125-E should be completed before entering any amounts on Line 12, page 1 of Form 1120.9 Insurance, Utilities, Service guarantees, Of?ce supplies and expense, Legal and accounting fees, Amortized bond issue expense, Travel expenses: The aggregate of these items is entered on Line 26, page 1 of Form 1120.10 Interest income, Corporate bonds, Amortized bond premium: Corporate bonds were purchased on July 1, 2010, for $23,875. The bonds mature on December 31, 2018, have a face value of $22,400, pay interest at 7%, and are expected to yield an effective rate of return of 6% (3% every six months for 17 periods). Falcon has elected to amortize the bond premium. The amortization for 2011 is $142 and is offset against the interest income reported on Line 5, page 1 of Form 1120. The carrying value of the bonds at the beginning of 2011 was $23,807.11 Dividends received, Domestic corporations: Falcon received $6,850 in dividends from Dunbar Steel, Inc. and $2,120 from Marshall Co. Both are domestic corporations and the dividends qualify for the 70% deduction. A cash dividend of $240 was received from Canadian Shipping, Ltd., a foreign corporation.12 Securities sales and worthless stock: On February 3, 2011, the corporation sold 100 shares of XYZ Corp. stock for $20,500. The stock was bought on May 26, 2010, for $18,487. On January 26, 2011, the corporation sold 200 shares of ABC Corp. preferred stock for $4,400. The stock had cost $4,755 on April 14, 2010. On May 14, 2011, the corporation sold for $15,100, net, U.S. Treasury bonds which had cost $15,000 on June 9, 2005. Further, 250 shares of Zero Corp. common stock becameworthless in 2011. It was acquired on January 30, 2000, for $12,500, which was its adjusted basis at the time it became worthless.13 Real estate sale: On July 5, 2011, the corporation sold vacant land for $30,000. It paid $12,712 for the land on June 1, 2001. The land had been used in the corporation?s business. (The sale would be reported on Form 4797, Part I, and the gain should be carried over to Schedule D, Line 7.)14 Fire loss: A shed used by the corporation in its manufacturing was destroyed by?re in February 2011. There was no insurance recovery. The shed had been acquired on January 2, 2001, at a cost of $10,000. Accumulated depreciation of $2,554 had been deducted since its acquisition. The shed had a fair market value of $3,000 prior to the?re, and a zero fair market value after the?re.15 Contributions: Contributions were made to the following organizations: United Charities, $750, Boy Scouts of America, $500, Red Cross, $250, and Community Fund, $750.16 Appropriated retained earnings: This?gure includes appropriations of $50,000 for sinking fund requirements (bond retirement fund), $15,000 for contingencies, and $2,544 for the cost of treasury stock. During 2011, there were appropriations of $10,000 to the sinking fund reserve and $3,000 to the contingency reserve.BALANCE SHEET AS OF JANUARY 1, 2011Assets...............................Cash................................Notes and accounts receivable..........InventoriesCorporate bonds......................Unamortized bond premium.............State and municipal bonds..............U.S. Treasury bonds....................Stocks:Domestic corporations..............Foreign corporations................Land................................Buildings.............................Machinery and equipment..............Of?ce furniture........................Trucks...............................Accumulated depreciationSinking fund?Bond retirement...........Goodwill.............................Cash surrender value of of?cers? life insurance..Total Assets.......................$Liabilities and Equity...................Accounts payable......................Notes payable (short-term)..............Other current liabilities:Accrued interest....................Accrued payroll.....................Accrued vacation pay................Accrued state income tax............Accrued property tax................Accrued employment taxes...........Bonds payable (long term)..............Capital stock:7% Preferred......................Common..........................Paid in surplus.....................Treasury stock.....................Retained Earnings:Unappropriated retained earnings.....Appropriated retained earnings.......Total Liabilities and Equity..............Additional InformationThe corporation had a $100 capital loss carryover from 2010.The corporation furnished the Government with information returns on Forms 1096 and 1099 for the dividends it paid during 2011 and also for other payments it made that required information returns.For purposes of the signatures on page 1 of Form 1120, it is assumed that John Service, of John Service, CPA, P.C. (EIN 361120987) prepared the return. His address is 1510 Steward Building, Suite 1500, Chicago, Illinois 60672, telephone number312-555-1120, his Social Security number is 311-62-4121, and F.L.Davis, President, has authorized John to discuss Falcon Machinery Inc.?s tax return with the IRS.

 

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