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Strayer ACC 317 Week 7- No More Ice Inc., Tax Problem

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Question;No More Ice, Inc. is owned by Rupert M. Peary and his wife, Josie J. Peary. The corporation manufactures a cordless handheld heated blower that melts snow and ice from car windshields. The device uses a 21 volt rechargeable battery (business activity code number 339900). The corporation has reported positive financial and taxable incomes since inception. The company is located at 200 Snowcap Way, Denali, Alaska 99502. The company?s employer identification number is 98-7654321, and the calendar year is used for tax purposes. The date of incorporation was March 14, 2007. Rupert M. Peary (social security number 111-11-1111) is an 80 percent shareholder and president of the company. Josie J. Peary (social security number 123-45-6789) is a 20 percent shareholder and vice president of the company. Both persons devote 100 percent of their time to the corporation. Rupert?s compensation is $138,326 per year, and Josie?s compensation is $76,848 per year. The corporation is not a personal holding company. While the corporation is a ?closely-held C corporation,? it does not engage in activities to which the at-risk or passive activity loss limitations apply. The corporation files its tax return on the accrual method. Inventory has been consistently valued at cost under the FIFO method using the full absorption procedure. Inventory capitalization rules of Internal Revenue Code Section 263A do not apply due to the ?small business exception? (average annual gross receipts for the three preceding taxable years do not exceed $10 million). The accounting records are computerized.The corporation?s audited income statement and balance sheet for the current year, prepared by the accounting firm of Bering & Beaufort, CPAs, follow:NO MORE ICE, INC. INCOME STATEMENT For the Year Ending December 31, 2012 Revenue: Sales (net).................................................................... $ 6,173,837) Cost of goods sold....................................................... (5,143,732) Gross profit...................................................................................... $ 1,030,105) Operating expenses: Compensation of officers............................................ $ 215,174) Other salaries and wages............................................. 473,329) Rental expense............................................................ 32,430 Interest expense........................................................... 82,049) Fines for improper disposal of waste.......................... 2,613) Advertising.................................................................. 8,268) Contributions............................................................... 34,583) Bad debt expense........................................................ 3,074) Depreciation expense.................................................. 105,980) Taxes........................................................................... 74,543) Repairs and maintenance............................................ 6,926) Miscellaneous expenses.............................................. 18,715 Total operating expenses.................................................................. $(1,057,684) Net Income from Operations............................................................ $ (27,579) Other income and loss: Dividend income......................................................... $ 102,735) Interest income............................................................ 2,250) Loss on sale of investment in stock............................ (2,458) 102,527) Net Income (Loss) before income tax.............................................. $ 74,948) Income tax expense................................................................................ (3,073) Net Income....................................................................................... $ 71,875)ADDITIONAL INFORMATION 1. No More Ice, Inc. made estimated tax payments attributable to 2012 of $4,611. The corporation also had a credit from an overpayment of its prior year Federal income taxes of $416 that it elected to apply against its 2012 tax liability. 2. All notes payable were issued at par and provide market interest rates. 3. Ignore state income taxes. 4. Dividend income is from the following sources: AT&T Corp................................................................................................ $60,470 Dell Corp.................................................................................................... 23,054) Voltage, Inc. (No More Ice, Inc. owns 85% of Voltage?s stock)............... 19,211) Total...................................................................................................... $102,735) 5. An analysis of the Allowance for Doubtful Accounts reveals: Balance, 01/01/12...................................................................................................... $13,833) 2012 Transactions? Provision for bad debts............................................................................... 3,074 Recoveries of bad debts.............................................................................. (653) Accounts written off as uncollectible......................................................... (1,076) Balance, 12/31/12................................................................................. $15,178) 6. Goodwill of $22,479 arose on purchase of another business on 01/01/12. Amortization is not being taken for financial purposes. 7. Assume that deductions for tax depreciation (i.e., Modified Accelerated Cost Recovery) for the year total $125,537. For this practice set do not complete Form 4562 (Depreciation and Amortization), but you must input the depreciation amount on Form 4562 for H&R Block Business to calculate limitations properly. 8. Meals and entertainment costs of $1,536 included in Miscellaneous Expenses are subject to the 50% disallowance rule. 9. Contributions included: Wildlife Federation..................................................................................... $29,664) Government of Kenya................................................................................ 3,383) Denali Food Bank....................................................................................... 1,536) Total...................................................................................................... $34,583) All contributions were paid in cash during the year except for the Food Bank contribution which was pledged by the corporation (i.e., approved by the Board of Directors) on December 17, 2012 and paid on May 2, 2013. 10. Included in interest income is $1,269 from $32,343 of Anchorage, Alaska General Obligation Bonds held throughout the current year. These bonds are included in the marketable securities account.11. On 05/19/12 the corporation sold 100 shares of Plug Corp. common stock for $8,454. The stock had been purchased on 07/23/08 for $10,912. 12. Voltage, Inc. is a subsidiary of No More Ice, Inc., formed in 2010, and operated in Wasilla, Alaska for the purpose of manufacturing battery chargers. Historically Voltage, Inc. has been profitable and had a taxable income of $78,629 and an Alternative Minimum Taxable Income [Form 4626, Ln. 7] of $79,143. No More Ice, Inc. and Voltage, Inc. have agreed to share equally any limitations on item(s) that the income tax law restricts across the corporations so long as the equal allocation results in utilization of maximum benefits available. However, if a corporation does not have sufficient investment, income, or tax to realize benefit of an item so allocated, any excess limitation shall be re-allocated to the other corporation to the extent that other corporation has sufficient investment, income, or tax liability to realize the benefit of the additional limitation. Sales by Voltage, Inc. to No More Ice, Inc. are at ?arms-length? prices (i.e., fair market values). No More Ice, Inc. has not elected to file a consolidated income tax return with Voltage, Inc. Voltage, Inc. (EIN 12-3456789) is located at 25 Husky Lane, Wasilla, Alaska 99623. 13. Form 4626 (Alternative Minimum Tax?Corporations) must be included in the return. For that purpose, assume the adjustment for depreciation of tangible property placed in service after 1986 (Form 4626, Line 2a) is a $22,931 positive adjustment. Assume the Adjusted Current Earnings (ACE) Adjustment on Line 4e is $-0-. [This assumption removes the ACE adjustment from this practice set]. 14. Disregard any penalty on underpayment of estimated tax. 15. Assume that compensation of officers and other salaries and wages do not relate to production activities. This assumption removes the Domestic Production Activities deduction from this practice set.REQUIRED From the above information, prepare No More Ice, Inc.?s 2012 Federal income tax return (Form 1120), including all needed supporting statements, schedules, and forms. Unless otherwise noted, assume No More Ice, Inc. follows the policies of making all elections to minimize its current income taxes and, to the extent possible, of conforming procedures for financial and tax accounting. Round amounts to the nearest dollar. If additional information is needed, make realistic assumptions and fill in all required data.

 

Paper#41947 | Written in 18-Jul-2015

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