Tax Form/Return Preparation Problems

TAX FORM/RETURN PREPARATION PROBLEMS

C:3-66

Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. 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 XX-2016014. The company incorporated on December 31, 2010 and began business on January 2, 2011. Table C:3-4 contains balance sheet information at January 1, 2014, and December 31, 2014. Table C:3-5 presents an income statement for 2014. These schedules are presented on a book basis. Other information follows the tables.

Estimated Tax Payments (Form 2220): The corporation deposited estimated tax payments as follows:

Although June 15 falls on a weekend, a deposit made on the next business day is considered made on the due date, June 15. Taxable income in 2013 was Sl.5 million, and the

TABLE C:3-4 Melodic Musical Sales, Inc.—Book Balance Sheet Information

Jan 1,2014 Dec 31, 2014

ACCOUNT DEBIT CREDIT DEBIT CREDIT

CASH 242,794 433,399

ACCOUNTS RECEIVABLE 360,000 450,000

ALLOWANCE FOR DOUBTFUL ACCOUNTS 18,000 22,500

INVENTORY 2,250,000 3,150,000

INVESTMENT IN CORPORATE STOCK 285,000 50,000

INVESTMENT IN MUNICIPAL BONDS 32,000 32,000

NET CURRENT DEFERRED TAX ASSET 12,920 7,650

CASH SURRENDER VALUE OF INS POLICY 50,000 70,000

LAND 250,000 250,000

BUILDINGS 1,500,000 1,500,000

ACCUMULATED DEPRECIATION-BUILDINGS 75,000 105,000

EQUIPMENT 1,200,000 2,400,000

ACCUMULATED DEPRECIATION-EQIPMENT 200,000 266,667

TRUCKS 200,000 200,000

ACCUMULATED DEPRECIATION-TRUCKS 60,000 100,000

ACCOUNTS PAYABLE 320,000 288,000

NOTES PAYABLE (SHORT-TERM) 600,000 480,000

ACCRUED PAYROLL TAXES 13,500 16,875

ACCRUED STATE INCOME TAXES 8,100 13,500

ACCRUED FEDERAL INCOME TAXES - 110,866

BONDS PAYABLE (LONG TERM) 2,200,000 2,200,000

NET NONCURRENT DEFERRED LIABILITY TAX 188,114 308,713

CAPITAL STOCK-COMMON 900,000 900,000

RETAIN EARNINGS-UNAPROPRIATE 1,800,000 3,730,928

TOTALS 6,382,714 6,382,714 8,543,049 8,543,049

2013 tax was $510,000. The corporation earned its 2014 taxable income evenly throughout the year. Therefore, it docs not use the annualization or seasonal methods.

Inventory and Cost of Goods Sold (Form 1125-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 on Form 1125-A. No other costs or expenses are allocated to cost of goods sold. Note: The corporation is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous three years was less than $10 million.

Compensation of Officers (Form 1125-E):

Bad Debts:

For tax purposes, the corporation uses the direct writeoff method of deducting bad debts. For book purposes, the corporation uses an allowance for doubtful accounts. During 2014, the corporation charged $36,000 to the allowance account, such amount representing actual writeoffs for 2014.

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TABLE C:3-5 Melodic Musical Sales, Inc.—Book Income Statement 2012

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 216,667

REPAIRS 18,720

GENERAL INS. 49,500

NET PREMIUM-OFF-LIFE INS 40,500

OFFICER’S COMPENSATION 585,000

OTHER SALARIES 360,000

UTILITIES 64,800

ADVERTISING 43,200

LEGAL AND ACCOUNTG FEES 45,000

CHARITABLE CONTRIBUTIONS 27,000

PAYROLL TAXES 56,250

INTEREST EXPENSE 189,000

BAD DEBT EXPENSE 40,500

TOTAL EXPENSES (1,736,137)

GAIN ON SALE OF EQUIPMENT 105,000

INTEREST ON MUNICIPAL BONDS 4,500

NET GAIN ON STOCK SALES 35,000

DIVIDEND INCOME 10,800

NET INCOME BEFORE INCOME TAXES 3,144,163

FEDERAL INCOME TAX EXPENSE (1,055,735)

STATE INCOME TAX EXPENSE (67,500)

NET INCOME 2,020,928

Additional Information (Schedule K):

Organizational Expenditures:

The corporation incurred $11,000 of organizational expenditures on January 2, 2010For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2011 and amortize the remaining $6,000 amount over 180 months, with a full month’s amortization taken for January 2011. The corporation reports this amortization in Part VI of Form 4562 and includes it in “Other Deductions” on Form 1120, Line 26.

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Capital Gains and Losses:

The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2014, for $150,000. The corporation acquired the stock on December 16, 2013, for $100,000. The corporation also sold 75 shares of JSB Corp. common stock on June 17, 2014, for $120,000. The corporation acquired this stock on September 18, 2012, for $135,000. The corporation has an $20,000 capital loss carryover from 2013. These transactions were not reported to the corporation on form 1099-B.

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 ten years (new); and Trucks, five years. The corporation takes a half-year’s depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements in Tables C:3-4 and C:3-5 reflect these calculations.

For tax purposes: All assets are MACRS property as follows: Store building, 39-year nonresidential real property; equipment, seven-year property; and trucks, five-year property. The corporation acquired the store building for $1.5 million and placed it in service on January 2, 2011. The corporation acquired two pieces of equipment for $400,000 (Equipment 1) and $800,000 (Equipment 2) and placed them in service on January 2, 2011. The corporation acquired the trucks for $200,000 and placed them in service on July 18, 2012. The trucks are not listed property and are not subject to the limitation on luxury automobiles. The corporation did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2014. Accumulated tax depreciation through December 31, 2013, on these properties is as follows:

On October 16, 2014, the corporation sold for $425,000 Equipment 1 that originally cost 400,000 on January 2, 2011. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2014, the corporation acquired and placed in service a piece of equipment costing $1.6 million. Assume these two transactions do not qualify as a like-kind exchange. The new equipment is seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment but elected out of bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2014 depreciation (reproduced in Appendix C of this text).

Other Information:

• • The corporation’s activities do not qualify for the U.S. production activities deduction.
• • Ignore the AMT and accumulated earnings tax.
• • The corporation received dividends (see Income Statement in Table C:3-5) from taxable, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20%.
• • The corporation paid $90,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.
• • The state income tax in Table C:3-5 is the exact amount of such taxes incurred during the year.
• • The corporation is not entitled any credits.
• • Ignore the financial statement impact of any underpayment penalties incurred on the tax return.

Required: Prepare the 2014 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules.

Optional: Prepare both Schedule M-3 (but omit Schedule B) and Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3.