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-2018016. The company incorporated on December 31, 2012, and began business on January 2, 2013. Table C:3-4 contains balance sheet information at January 1, 2016, and December 31, 2016. Table C:3-5 presents an unaudited GAAP income statement for 2016. 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:

Table C:3-4

Taxable income in 2015 was $1.6 million, and the 2015 tax was $544,000. The corporation earned its 2016 taxable income evenly throughout the year. Therefore, it does 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 2016, the corporation charged $38,000 to the allowance account, such amount representing actual writeoffs for 2016.

Table C:3-5

Additional Information (Schedule K):

1 b Accrual

2 a 451140

b Retail sales

c Musical instruments

3 No

4 a No

b Yes; omit Schedule G

5 a No

b No

6-7 No

8 Do not check box

9 Fill in the correct amount

10 3

11 Do not check box

12 Not applicable

13-14 No

15a No

b Do not check box

16-19 No

Organizational Expenditures:

The corporation incurred less than $5,000 of organizational expenditures in the year it began business. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct the entire amount of expenditures in the year it began business. Therefore, no amortization expenditures appear in the tax return or book financial statements for the current year.

Capital Gains and Losses:

The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2016, for $150,000. The corporation acquired the stock on December 15, 2015, for $100,000. The corporation also sold 75 shares of JSB Corp. common stock on June 17, 2016, for $120,000. The corporation acquired this stock on September 18, 2014, for $135,000. The corporation has a $20,000 capital loss carryover from 2015. 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, ten years; 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 $2 million and placed it in service on January 2, 2013. 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, 2013. The corporation acquired the trucks for $200,000 and placed them in service on July 18, 2014. 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 2016. Accumulated tax depreciation through December 31, 2015, on these properties is as follows:

Store building .....................................$ 151,780

Equipment..................................... 225,080

Equipment ..................................... 450,160

Trucks .....................................104,000

On October 16, 2016, the corporation sold for $440,000 Equipment 1 that originally cost 400,000 on January 2, 2013. The corporation had no Sec. 1231 losses from prior years.?

In a separate transaction on October 17, 2016, the corporation acquired and placed in service a piece of equipment costing $1,500,000. 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 2016 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 $95,000 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 has not entitled to any credits.

 Ignore the financial statement impact of any underpayment penalties incurred on the tax return.

Required:

Prepare the 2016 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules.?

Prepare both Schedule M-3 (but omit Schedule B and Form 8916-A) and Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3.

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January 1, 2016 December 31, 2016 Account Debit Credit Debit Credit Cash $ 216,673 $ 328,673 Accounts receivable Allowance for doubtful accounts 380,000 475,000 $ 19,000 $ 23,750 Inventory Investment in corporate stock Investment in municipal bonds Cash surrender value of insurance policy 2,375,000 285,000 60,000 80,000 400,000 2,000,000 3,325,000 50,000 60,000 100,000 400,000 2,000,000 Land Buildings Accumulated depreciation-Buildings Equipment Accumulated depreciation-Equipment Trucks 100,000 140,000 1,200,000 2,300,000 300,000 355,000 200,000 200,000 Accumulated depreciation-Trucks Accounts payable Notes payable (short-term) Accrued payroll taxes Accrued state income taxes 60,000 100,000 400,000 900,000 14,136 4,275 2,375 2,400,000 360,000 720,000 17,670 7,125 122,304 2,200,000 Accrued federal income taxes Bonds payable (long-term) Net deferred tax liability Capital stock-Common Retain earnings-Unappropriated 146,887 950,000 1,900,000 276,247 950,000 3,966,577 $7,196,673 $7,196,673 $9,238,673 $9,238,673 Totals