Rachael Ray, Paula Deen and Gordon Ramsay each own one-third of the common stock
ID: 1138894 • Letter: R
Question
Rachael Ray, Paula Deen and Gordon Ramsay each own one-third of the common stock of Celebrity Catering Services, Inc. (CCS). CCS was incorporated on February 2, 2009. It has only one class of stock outstanding and operates as a C corporation for tax purposes. CCS caters to all types of social events.
CCS is located at 540 Waverly Way Burbank, CA 91501
Its employer ID is 38-4743474
CCS’s business activity is catering food services. Its business activity code is 722300.
The shareholders also work as officers for the corporation as follows:
o Rachael is the chief executive officer and president, (SS# 231-54-8976). o Paula is the executive VP and Chief operating officer (SS#798-56-3241). o Gordon is the VP of Finance (SS# 879-21-4536).
All officers devote 100% of their time to the business and all of the officers are US citizens.
CCS uses the accrual method of accounting and has a fiscal year-end of June 30th.
CCS made four equal quarterly estimated tax payments of $36,000 each. Its tax liability last
year was $134,800. If it has overpaid its federal tax liability, CCS would like to receive a
refund.
In the prior year, the company made a large charitable contribution. $45,000 of that
contribution exceeded the amount deductible and was carried forward to the current year.
CCS paid a dividend of $75,000 to each of its shareholders on June 1. CCS had ample earnings
and profits (E&P) to absorb the distribution.
Income Statement
Income
Sales
$3,245,000
Sales returns and allowances
-32,000
Net sales
3,213,000
Cost of goods sold
1,090,000
Gross profit
2,123,000
Net Capital loss
-$11,000
Dividend income
29,000
Interest income
7,600
Total income
$2,148,600
Expenses
Salaries and wages
785,000
Bad Debt
25,000
Meals
12,000
Entertainment
15,000
Repairs and Maintenance
8,000
Property Taxes
5,000
State Income Tax
23,000
Payroll Taxes
167,500
Charitable Contribution
45,000
Equipment Rent
40,000
Warehouse Rent
180,000
Interest
5,800
Advertising
32,000
Professional Services
27,000
Depreciation
24,000
Employee benefits Programs
51,500
Other Miscellaneous Expenses
15,200
Total expenses
1,461,000
Net income before taxes
$687,600
Federal income taxes
-186,983
Net income after taxes
$500,617
[1] CCS’S inventory-related purchases during the year were $250,000 and direct labor of $850,000. It values its inventory based on cost using FIFO inventory cost flow method. CCS must use the 263A method for valuing its inventory for tax purposes the beginning balance of 263A adjustment is $11,000 and the ending value is $9,000. The current year additional §263A costs are $92,000 of the officer’s salary.
[2] CCS’s dividend income came from Sinful Desserts, Inc. (SD) CCS owned 10,000 shares of stock in SD at the beginning of the year this represented 16% of SD’s outstanding stock.
[3] $1,200 was from a City of Irvine bond that was used to fund public activities (issued in 2006), $1,100 was from an Oceanview City bond used to fund public activities (issued in 2005), $ 900 was from a US Treasury Bond and the rest was from a money market account at Bank of America.
[4] The officers’ salaries included are: Rachael Ray -$250,000; Paula Deen - $ 190,000 and Gordon Ramsey -$220,000
[5] The interest expense was from an ordinary and necessary deductible business loan.
[6] None of the depreciation will be claimed on 1125A. The MACRS depreciation has been computed as $ 10,200 for assets not
purchased during the current fiscal year. The straight-line depreciation method is reflected on the financial statements.
[7] Includes $3,600 for premiums paid on term life insurance policies for which CCS is the beneficiary. The policies cover Rachael, Paula and Gordon. The rest are regular miscellaneous, ordinary and necessary expenses.
Balance Sheet
Assets
7/1/17
6/30/18
Cash
$180,000
$408,300
Trade and accounts receivables
586,000
566,000
Allowance for Doubtful Accounts
-60,000
-63,000
Inventories
140,000
150,000
U.S. government bonds
20,000
20,000
State & Local bonds
120,000
120,000
Investment In Stock
400,000
354,000
Prepaid Federal Income Taxes
0
0
Property, plant and equipment
140,000
160,000
Accumulated depreciation
-50,000
-64,000
Other assets
20
25,000
Total Assets
$1,496,000
$1,676,300
Liabilities and Owners' Equity
Accounts payable
$306,000
$153,700
Income Taxes Payable
5,000
37,612
Deferred Tax Liability
10,000
15,371
Other current liabilities
5,000
21,000
Other Liabilities
40,000
43,000
Capital stock
400,000
400,000
Retained earnings
730,000
1,005,617
Total Liabilities and Owners' Equity
$1,496,000
1,676,300
[1] CCS wrote off $22,000 as uncollectible during the year. [2] On October 15, 2017 CCS sold 1,000 shares of SD stock for $34,000. It had originally purchased these shares on April 18, 2010 for $46,000. After the sale CCS owns 14.4 percent of SD. [3] On November 12, 2017 CCS purchased three industrial Hobart mixers for $5,000 each and a Wolf Convection Double Stack Commercial Oven for $15,000. [4] On December 5, 2017 they sold two old mixers that had been fully depreciated. The old mixers had been purchased at $5,000 each and were sold for $500 each.
Required:
Complete Celebrity Catering Service Inc.’s (CCS) Form 1120 and all related schedules. Be sure to attach schedules for any line item, which indicates one is required on the 1120.
If any information is missing, use reasonable assumptions to fill in the gaps and list those assumptions as an attachment.
The forms schedules and instructions can be found at www.irs.gov and download the necessary forms.
Income
Sales
$3,245,000
Sales returns and allowances
-32,000
Net sales
3,213,000
Cost of goods sold
1,090,000
Gross profit
2,123,000
Net Capital loss
-$11,000
Dividend income
29,000
Interest income
7,600
Total income
$2,148,600
Expenses
Salaries and wages
785,000
Bad Debt
25,000
Meals
12,000
Entertainment
15,000
Repairs and Maintenance
8,000
Property Taxes
5,000
State Income Tax
23,000
Payroll Taxes
167,500
Charitable Contribution
45,000
Equipment Rent
40,000
Warehouse Rent
180,000
Interest
5,800
Advertising
32,000
Professional Services
27,000
Depreciation
24,000
Employee benefits Programs
51,500
Other Miscellaneous Expenses
15,200
Total expenses
1,461,000
Net income before taxes
$687,600
Federal income taxes
-186,983
Net income after taxes
$500,617
Explanation / Answer
You can see that, over a little more than a week, the euro became much more valuable relative
to the pound. Most notably, there was a big increase in the price of the euro between March 9
and March 19, and then prices settled down a bit. This was a wild week for the international
economy. In the United States, the Federal Reserve announced major financial support for
Wall Street firms on March 16 and then reduced interest rates on March 19. Around the same
time, the European Central Bank (ECB) and the Bank of England in London were also taking
actions to try to calm the financial markets. At least for a period of time, they seemed to
succeed in stopping the rapid rise of the euro against the British pound. It is striking that
much of the financial action was taking place in the United States, yet the markets in which
Europeans trade currencies were also affected.
The story at the bottom of Figure 2.2 "Price of Euro in British Pounds, March 2008"discusses
the response of Asian stock markets to the action of the US Federal Reserve. Markets all over
the world increased in value after the action of the FOMC. The actions of the Fed matter well
beyond the borders of the United States. Bankers and businesspeople all over the globe are
“Fed watchers.”
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