I:6-62 Scarlet Furniture Corporation, an accrual-method taxpayer, retails custom office furniture.

On January 1 of the current year, Peter Marlin and John Tanner incorporated Scarlet Furniture Corporation. Peter transferred $350,000 cash for 70% of Scarlet’s outstanding stock, and John transferred $150,000 cash for 30% of the outstanding stock. Scarlet generated the following financial statements at the end of its first year of operations:

Scarlet Corporation’s Balance Sheet Assets Cash $ 91,400 Inventory 48,000 Other Current Assets 50,000 Office Equipment 170,000 Building 250,000 Accumulated Depreciation (20,000)

Land 550,000 Total Assets $1,139,400 Liabilities and Owner’s Equity Accrued Expenses $ 100,000 Long Term Debt 400,000 Common Stock 500,000 Retained Earnings 139,400 Total Liabilities and Owners’ Equity $1,139,400 Scarlet Corporation’s Income Statement Revenues $650,000 Costs of Goods Sold 100,000 Gross Income $550,000 Advertising Expense 40,000 Depreciation Expense 20,000*

Miscellaneous Expense 10,600**

Office Supplies 5,000 Property Tax Expense 60,000 Wages & Salaries Expense 135,000***

Warranty Expense 10,000****

Operating Income $269,400 Interest Expense 30,000 Federal Income Tax Expense 100,000 Net Income $139,400