ACCT 5220 Fall 2010 Corporate Tax Return Problem Knoxville Musical Sales, Inc. i
ID: 2700806 • Letter: A
Question
ACCT 5220
Fall 2010
Corporate Tax Return Problem
Knoxville Musical Sales, Inc. is located at 5500 Kingston Pike, Knoxville, TN 37919. The corporation uses the calendar year and accrual basis for both book and tax purposes. It is engaged in the sale of musical instruments with an employer identification number (EIN) of 75-2008006. The company incorporated on December 31, 2005 and began business on January 2, 2006. Table 1 contains the balance sheet information at January 1, 2010 and December 31, 2010. Table 2 contains the income statement for 2010. These schedules are presented on a book basis.
Table 1
Knoxville Musical Sales, Inc. %u2013 Book Balance Sheet Information
Account Jan 1, 2010 Dec. 31, 2010
Debit Credit Debit Credit
Cash $ 254,567 $ 107,357
Accounts Receivable 417,960 486,000
Allow. for Doubtful Acct $ 35,527 $ 41,310
Inventory 2,250,000 3,150,000
Inv. in corporate stock 180,000 37,000
Inv. in municipal bonds 30,000 30,000
Cash surrender value of insurance policy
20,000
34,000
Land 500,000 500,000
Buildings 2,500,000 2,500,000
Accum. Dep. 2013 Buildings 125,000 175,000
Equipment 600,000 840,000
Accum. Dep. 2013 Equipment 100,000 115,333
Trucks 230,000 145,000
Accum. Dep. 2013 Trucks 69,000 14,500
Accounts Payable 1,500,000 550,000
Notes Payable (short-term) 500,000 600,000
Accrued payroll taxes 25,000 28,000
Accrued state income taxes 8,000 12,000
Accrued federal income taxes 126,000
Bonds payable (long-term) 1,800,000 1,400,000
Deferred tax liability 70,000 75,000
Capital Stock- Common 1,500,000 1,500,000
Retained Earnings 1,250,000 3,192,214
Totals $6 ,982,527 $ 6,982,527 $ 7,829,357 $7,829,357
Table 2
Knoxville Musical Sales, Inc. - Book Income Statement 2010
Sales $ 9,000,000
Returns (225,000)
Net Sales $ 8,775,000
Beginning Inventory $ 2,250,000
Purchases 4,950,000
Ending inventory (3,150,000)
Cost of Goods Sold (4,050,000)
Gross Profit $ 4,725,000
Expenses
Amortization $ -0-
Depreciation 142,833
Repairs 18,720
General insurance 49,500
Officer2019s life insurance 40,500
Officer2019s compensation 585,000
Other salaries 360,000
Utilities 64,800
Advertising 43,200
Legal & Accounting 45,000
Charitable contributions 27,000
Employment tax 56,250
State tax 67,500
Interest 189,000
Bad debts 41,783
Total Expenses (1,731,086)
Loss on exchange of truck (18,000)
Gain on sale of equipment 90,000
Interest on muni bonds 4,500
Net gain on stock sales 14,000
Dividend Income 10,800
Net income before FIT $ 3,095,214
Federal income tax (1,063,000)
Net income per books $ 2,032,214
Other information follows:
Estimated Tax Payments:
The corporation deposited estimated tax payments as follows:
April 15, 2010 $118,000
June 15, 2010 243,000
September 15, 2010 285,000
December 15, 2010 285,000
Total $931,000
Taxable income in 2010 was $2,200,000, and the 2010 tax was $748,000. The corporation earned its 2008 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods. Form 2220 is not required.
Inventory and Cost of Goods Sold (Schedule A):
The corporation uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory and purchases should be reflected in Schedule A. No other costs or expenses are allocated to cost of goods sold. Note: the corporation is exempt from the uniform capitalization rules because average gross income fore the previous three years was less than $10 million.
Compensation of Officers (Schedule E):
(a) (b) (c) (d) (f)
Mary Travis 343-82-7091 100% 50% $265,000
John Willis 783-97-9105 100% 25% 160,000
Chris Parker 465-34-2245 100% 25% 160,000
Total $585,000
Bad Debts:
For tax purposes, the corporation uses the direct write-off method of deducting bad debts. For book purposes, the corporation uses an allowance for doubtful accounts. During 2010, the corporation charged $36,000 to the allowance account, such amount representing actual write-offs for 2010.
Additional Information (Schedule K):
Line 1b Accrual Line 11 Do not check box
2a 451140 12 Not applicable
2b Retail Sales 13 No
2c Musical Instruments
3-4 No
5 Yes, 50%
6-7 No
8 Do not check box
9 Fill in the correct amount
10 3
Organization Expenses:
The corporation incurred $6,000 of organizational expenditures on January 2, 2006. For book purposes, the corporation expensed the entire expenditure pursuant to Statement of Position 98-5. For tax purposes, the corporation elected under Section 248 to deduct $5,000 and to amortize the remainder over 180 months, with a full month%u2019s amortization taken for January 2006. The corporation reports this amortization in Part IV of Form 4562 and includes it in %u201COther Deductions%u201D on Form 1120, Line 26.
Capital Gains and Losses:
The corporation sold 100 shares of PDQ Corp. common stock on March 7, 2010 for $95,000. The corporation acquired the stock on December 15, 2008 for $65,000. The corporation also sold 75 shares of JSB Corp. common stock on September 17, 2010 for $62,000. The corporation acquired this stock on September 18, 2006 for $78,000. The corporation has an $8,000 capital loss carryover from 2009.
Fixed Assets and Depreciation:
For book purposes: The corporation uses straight-line depreciation over the useful lives of assets as follows: Store building, 50 years; Equipment, 15 years (old) and 10 years (new); and Trucks, five years (old and new). The corporation takes a half-year%u2019s depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements reflect these calculations. The designation %u201Cold%u201D refers to property placed in service before 2010, and the designation %u201Cnew%u201D refers to property placed in service in 2010.
For tax purposes: All assets are MACRS property as follows: Store building, 30 year nonresidential real property; Equipment, seven year property; Trucks, five year property. The corporation acquired the store building for $2.5 million and placed it in service on January 2, 2006. The corporation acquired two pieces of equipment for $200,000 (Equipment 1) and $400,000 (Equipment 2) and placed them in service on January 2, 2006. The corporation acquired the old trucks for $230,000 and placed them in service on July 18, 2008. The corporation did not make the expensing election under Section 179 on any property acquired before 2010 and elected not to claim bonus depreciation. Also, the corporation did not elect the straight-line option or the alternative depreciation system under MACRS. Accumulated tax depreciation through December 31, 2009 on these properties is as follows:
Store Building $189,725
Equipment 1 112,540
Equipment 2 225,080
Trucks 119,600
On November 16, 2010, the corporation sold for $250,000 Equipment 1 that originally cost $200,000 on January 2, 2006. The corporation had no Section 1231 losses from prior years. In a separate transaction on November 17, 2010, the corporation acquired and placed in service a piece of equipment costing $440,000. These two transactions do not qualify as a like-kind exchange under Section 1031. The new equipment is seven year property. The corporation made the Section 179 expensing election with regard to the new equipment.
Other Information:
%u2022 The corporation%u2019s activities do not qualify for U.S. production activities deduction.
%u2022 Ignore the AMT and accumulated earnings tax.
%u2022 The corporation received the $10,800 in dividends from taxable, domestic corporations of which Knoxville Musical Sales, Inc owns less than 20%.
%u2022 The corporation paid $90,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.
%u2022 The corporation issued the bonds payable at par. Thus, no premium or discount need be amortized.
%u2022 The corporation is not entitled any credits.
Required
Prepare the 2010 corporate tax return for Knoxville Musical Sales, Inc. along with any necessary supporting forms and schedules.
Explanation / Answer
Its difficult to answer ur question this way until you put it into a table to make it look somewhat logical dear. Please co-operate to make it look simple to solve. :-)
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