Question;FORM 1120S ?;U.S. INCOME TAX RETURN FOR AN S CORPORATION;On March 12;1994, Douglas Plastics Co., which is located at 2400 Lakeview Street, Fargo;North Dakota, 58103, (312) 555-8697, filed an election under Code Sec. 1362(a);to be treated as an S corporation.;Douglas;Plastics Co. was incorporated January 1, 1994, under the laws of the State of;North Dakota. It is engaged in the manufacture of plastic products, principally;toys (principal business activity code number 326100). Its employer;identification number is 31-0031258.;In 2013, the;corporation had two equal stockholders and each devoted 100% of their time to;the business. There were no changes in stock own- ership during 2013, and each;stockholder owned 1250 shares of the corporation. One of these stockholders;Douglas Pratt, served as president.;He resides;at 660 Springsteen Street, Fargo, North Dakota 58103. His social security;number is 555-11-6789. The other stockholder, Rickie L. Jones, served as vice;president. He resides at 425 State Street, Fargo, North Dakota, 58103. His;social security number is 555-33-9876. In 2013, Mr. Pratt?s compensation was;$50,000 and Mr. Jones? compensation was $46,000.;The;corporation hired the outside firm of ATOZ Accounting Services (EIN 21-7777777);located at 1120 Main Street in Waytogo, North Dakota, 58103, (701) 555-1120, to;prepare its income tax return on the accrual basis. Dewey Fugim prepared the;return. Mr. Fugim (Preparer Tax Identification Number P12345678) is new to the;firm and Mr. Pratt is uncomfortable with him discussing the tax return with the;IRS without his knowledge and decides not to give him tax return preparer;permission.;Form 4562;On January;3, 2012, Douglas acquired molds and patterns at a cost of $12,000. The molds;and patterns are three-year MACRS property depreciated using the 200% declining;balance method and a half-year convention. Bonus depreciation was not claimed;because the assets are used. No Code Sec. 179 expense deduction was taken. The;2013 depreciation deduction on the molds and patterns amounts to $5,333. A;$4,000 depreciation deduction was claimed in 2012.;On June 18;2011, used but reconditioned seven-year MACRS machinery was acquired at a cost;of $138,500. Douglas elected to depreciate the machinery using the alternative;depreciation method with an 11-year recovery period. No bonus depreciation was;claimed and no Code Sec. 179 expense was elected for this property. The 2013;depreciation deduction on the machinery is $12,591. Accumulated depreciation at;the beginning of 2013 is $18,892.;On February;11, 2013, Douglas acquired seven-year MACRS office furniture and fixtures at a;cost of $4,000. Douglas elects to expense the entire amount under Code Sec.;179.;On January;2, 1997, Douglas acquired a brick storage building at a cost of $110,000. The;building is depreciated using the straight-line method over a 311?2 year life.;The 2013 depreciation deduction on the building amounts to $3,492. Accumulated;depreciation at the beginning of 2013 is $55,729.;Form 4797;On January;30, 2013, Douglas sold machinery for $3,500. The machinery, which is 7-year;MACRS property, was purchased on January 14, 2009 for $10,000 and depreciated;using the 200-percent declining-balance method and a half-year convention.;Accumulated depreciation was $7,323 on the date of sale.;On January;18, 2013, Douglas sold a building for $62,500. The building was acquired on;January 10, 1997, at a cost of $90,000. Douglas has accumulated depreciation on;the building of $45,597 at the beginning of 2013. Also, on January 18, 2013;the corporation sold the land associated with the building for $13,000. The;land was acquired at a cost of $10,000.;Charitable;Contributions;The;following charitable contributions to 50% organizations located in Fargo, North;Dakota were made by the corporation in 2013. Community Fund, $500: Mercy;Hospital, $500, Congregational Church, $250, and Boy Scouts of America, $250.;Distributions;The;corporation made cash distributions of $80,000 on March 12, 2013, and $120,000;on May 5, 2013. The distributions were in proportion to stock holdings.;From 1120S ?;Schedule D;The;corporation sold 100 shares of Nicole Co. stock on January 16, 2013, for;$7,775. Douglas Plastics Co. received a 1099-B reporting that the stock was;purchased on March 12, 1997, for $9,689.;ADJUSTED;TRIAL BALANCE;The;following is the adjusted trial balance of Douglas Plastics Co. as of December;31, 2013;Gross sales $692,759;Returns and allowances $ 7,360;Inventory adjustment 1 6,565;Purchases 100,650;Factory salaries and wages 180,235;Freight expense 950;Factory insurance 4,200;Factory utilities 10,850;Factory water 1,150;Factory payroll taxes 16,110;Factory real estate taxes 5,000;Dividends received (domestic) 2 788;Interest on U. S. obligations 2 2,990;Interest on tax-exempt state bonds 1,635;Expense related to tax-exempt bonds 90;Other interest 2 472;Gross rents 3 4,000;Loss on sale of stock 4 1,914;Gain on sale of building 4 18,216;Gain on sale of land 4 3,000;Gain on sale of machine 4 823;Bad debts 4,500;Rents paid;1,200;Motor vehicle tax 100;Employment taxes 11,157;Franchise tax 300;Real property tax 1,680;Charitable contributions 1,500;Employee health insurance costs 34,000;Depreciation 25,982;Postage 4,683;Office supplies 3,760;Telephone 4,630;Meals and entertainment;(subject to 50% limitation) 6,600;Shareholder distributions, 3/12/13;80,000;Shareholder distributions, 5/5/13 120,000;Officers? salaries 96,000;Salaries/wages of salespersons and;office personnel 39,446;Repairs 3,694;Interest paid 13,620;Advertising 3,500;Pension plan contributions 8,805;Cash 60,662;Closing inventory 125,330;Notes and accounts receivable 19,210;Prepaid insurance 300;North Dakota municipal bonds 30,000;U.S. Series EE Bonds 24,450;100S Nicole Co. Common Stock 9,700;Brick storage building (acquired 1/2/97) 110,000;Factory equipment (acquired 6/18/11) 138,500;Molds and patterns (acquired 1/3/12) 12,000;Furniture and fixtures (acquired 2/11/13) 4,000;Accumulated depreciation;104,037;Land 20,000;Accounts payable 90,749;Short-term notes payable to banks 10,000;Accrued payroll taxes 4,410;Long-term notes payable 210,000;Capital stock 5,000;Accumulated adjustments account;(as;of 1/1/13) 5 190,734;Other adjustments account;(as of 1/1/13) 5 1,640;$1,347,818 $1,347,818;1 Inventory adjustment:The inventory adjustment figure represents the difference between;the opening inventory and the closing inventory. This figure, as such, will not;appear on the return. The inventories are taken at cost or market, whichever is;lower. There was no change in determining the quantities, cost or valuations;between the opening and closing inventory.;2 Dividends received, U.S. obligations;interest, Other interest:The Nicole Co. dividend;income of $788, the interest earned on the U.S. Series EE Bonds of $2,990, and;the other interest of $472 from Fargo National Bank, is portfolio income. As;such, these items are reported on Schedules K and K-1.;3 Gross rents:The gross rents of $4,000 represent gross income from a rental;activity other than real estate and are reported on Schedules K and K-1. There;were no related expenses.;4 Stock sale loss, Building sale gain;Land sale gain, Machine sale gain:For purposes of;reporting these items on Form 1120S, it is necessary to first report each of;them either on Schedule D or on Form 4797, as applicable. The capital loss and;any Code Sec. 1231 gain are reported on Schedules K and K-1.;5 Accumulated adjustments account, Other;adjustments account:The amount of the ?Retained;earnings? as reported on Line 24, column (b) of Schedule L is the sum of the;Accumulated Adjustments account and the Other Adjustments account at the;beginning of 2013. Schedule M-2 must be completed to determine the amount;reported on Line 24, column (d) of Schedule L.;The following is a balance sheet for;Douglas Plastics Co. as of December 31, 2012;Assets;Cash $ 50,706;Notes and accounts receivable;94,210;Inventories 118,765;Prepaid insurance 530;U.S. Series EE Bonds 10,368;North Dakota municipal bonds 30,000;Loans to shareholders 2,000;200 shares - Nicole Co. ? Common 19,389;Buildings and other depreciable assets 360,500;Less: Accumulated depreciation 131,094;Net depreciable assets;229,406;Land 30,000;Total assets $585,374;Liabilities and Capital;Accounts payable;$155,905;Short-term notes payable to banks 20,000;Accrued payroll taxes 2,095;Long-term notes 210,000;Capital stock 5,000;Accumulated adjustments account 190,734;Other adjustments account 1,640;Total liabilities and capital $585,374;Douglas Plastics Co. filed all other;necessary information and tax returns for 2013, including Form 1096 and Form(s);1099.
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