1. Comprehensive Tax Return Problem. The Snap-It-Open Corporation incorporated and began operations on January 15 of the current year. Its address is 3701 Commerce Drive, Baltimore, MD 23239. Its employer identification number is 69-7414447. It elects to file its initial tax return as a calendar-year corporation and uses the accrual method of accounting. It elects the FIFO method of inventory valuation. Jason Sprull (SSN 333-33-3333) and Martin Winsock (SSN 555-55-5555) formed the business. They each contributed $250,000 cash for 50 percent of the 100,000 shares of $1 par value stock issued and outstanding. The company was formed to assemble and market a unique, compact, snap-open umbrella and its business activity code is 339900. These umbrellas are sold to a variety of organizations as premiums. The company purchases the umbrella frames and several types of waterproof fabric for the umbrella material and covers from various manufacturers. It prints the organizations' advertising logos or other designs on the umbrella material and covers. It then assembles these on the umbrella frames for delivery to the customer along with the covers. On January 16, the company placed in service two new machines that they had purchased for $250,000 each for printing and cutting the fabric for the umbrellas and two used umbrella assembly machines purchased for $200,000 each. The company obtained a bank loan of $750,000 secured by the machines. Jason and Martin were required to personally guarantee this loan that has an 8 percent annual interest rate on the unpaid balance. The first principal and interest payment of $160,000 is not due until January 16 of next year. During the year, the company purchased $250,000 of fabric and $310,000 of umbrella frames. It returned one order of frames valued at $5,000 because of a defect in the snap-open mechanism and received a cash refund for that amount. Both Jason and Martin work full-time in the business. Jason is the salesperson for the company and Martin manages the office and the printing and assembly operations. Each receives a salary of $60,000 per year. They have six employees with the following incomes for the year: $45,000 for an accountant; $21,000 for a receptionist; $28,000 for each of two print machine operators; and $25,000 for each of two assembly machine operators. There are no accrued salaries or taxes as of the end of the current year. FUTA taxes are assessed on the first $7,000 of wages at a rate of 6.0 percent. By the end of the year, the company had $1,935,000 in umbrella sales, collected $1,430,000 on these sales, and paid the following expenses in cash: Rent $240,000 Repairs and maintenance 20,000 Utilities 80,000 Taxes and licenses (excluding FICA and FUTA taxes) 10,000 Health insurance 16,000 Advertising 40,000 Travel (excluding meals) 20,000 Meals and entertainment 15,000 Group term life insurance 2,000 As an accrual-basis taxpayer, the company recognized $57,500 in interest expense on the note ($750,000 .08 11.5/12) and established an allowance account for bad debts equal to two percent of sales. They recognized depreciation expense for financial accounting equal to 10 percent of the purchase price for the new printing machines and 12.5 percent of the purchase price for the used assembly machines. Their inventory at year-end consisted of $65,000 of fabric and $68,000 of umbrella frames based on the FIFO inventory method. (For simplicity, you are only required to allocate the factory salaries to the calculation of cost of goods sold.) The company made estimated tax payments of $40,000 for the year.

Complete a Form 1120 for Snap-It-Open Corporation using the following additional information. The corporation wrote off no bad debts for the year and it maximized its cost recovery deductions on the four machines purchased

FORM 1120

U.S. Corporation Income Tax Return For calendar year 2016 or tax year beginning , 2016, ending , 20 Information about Form 1120 and its separate instructions is at www.irs.gov/form1120. OMB No. 1545-0123 2016 TYPE OR PRINT Name Number, street, and room or suite no. If a P.O. box, see instructions. City or town, state, or province, country, and ZIP or foreign postal code A Check if: 1a Consolidated return (attach Form 851) . b Life/nonlife consolidated return . . . 2 Personal holding co. (attach Sch. PH) . . 3 Personal service corp. (see instructions) . . 4 Schedule M-3 attached B Employer identification number C Date incorporated D Total assets (see instructions) $ E Check if: (1) Initial return (2) Final return (3) Name change (4) Address change Income 1a Gross receipts or sales . . . . . . . . . . . . . . . . . 1a b Returns and allowances . . . . . . . . . . . . . . . . . 1b c Balance. Subtract line 1b from line 1a . . . . . . . . . . . . . . . . . . . . 1c 2 Cost of goods sold (attach Form 1125-A) . . . . . . . . . . . . . . . . . . . . 2 3 Gross profit. Subtract line 2 from line 1c . . . . . . . . . . . . . . . . . . . . 3 4 Dividends (Schedule C, line 19) . . . . . . . . . . . . . . . . . . . . . . 4 5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 Gross rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 Gross royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 Capital gain net income (attach Schedule D (Form 1120)) . . . . . . . . . . . . . . . 8 9 Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) . . . . . . . . . . . 9 10 Other income (see instructionsattach statement) . . . . . . . . . . . . . . . . . 10 11 Total income. Add lines 3 through 10 . . . . . . . . . . . . . . . . . . . . 11 Deductions (See instructions for limitations on deductions.) 12 Compensation of officers (see instructionsattach Form 1125-E) . . . . . . . . . . . . 12 13 Salaries and wages (less employment credits) . . . . . . . . . . . . . . . . . . 13 14 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . 14 15 Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16 Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17 Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 19 Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . 19 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) . . 20 21 Depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 23 Pension, profit-sharing, etc., plans . . . . . . . . . . . . . . . . . . . . . 23 24 Employee benefit programs . . . . . . . . . . . . . . . . . . . . . . . 24 25 Domestic production activities deduction (attach Form 8903) . . . . . . . . . . . . . . 25 26 Other deductions (attach statement) . . . . . . . . . . . . . . . . . . . . . 26 27 Total deductions. Add lines 12 through 26 . . . . . . . . . . . . . . . . . . . 27 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11. 28 29a Net operating loss deduction (see instructions) . . . . . . . . . . 29a b Special deductions (Schedule C, line 20) . . . . . . . . . . . . 29b c Add lines 29a and 29b . . . . . . . . . . . . . . . . . . . . . . . . . 29c Tax, Refundable Credits, and Payments 30 Taxable income. Subtract line 29c from line 28. See instructions . . . . . . . . . . . . 30 31 Total tax (Schedule J, Part I, line 11) . . . . . . . . . . . . . . . . . . . . . 31 32 Total payments and refundable credits (Schedule J, Part II, line 21) . . . . . . . . . . . . 32 33 Estimated tax penalty. See instructions. Check if Form 2220 is attached . . . . . . . . 33 34 Amount owed. If line 32 is smaller than the total of lines 31 and 33, enter amount owed . . . . . 34 35 Overpayment. If line 32 is larger than the total of lines 31 and 33, enter amount overpaid . . . . . 35 36 Enter amount from line 35 you want: Credited to 2017 estimated tax Refunded 36 Sign Here Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Signature of officer Date Title May the IRS discuss this return with the preparer shown below? See instructions. Yes No Paid Preparer Use Only Print/Type preparers name Preparers signature Date Check if self-employed PTIN Firms name Firms address Firms EIN Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11450Q Form 1120 (2016) Form 1120 (2016) Page 2 Schedule C Dividends and Special Deductions (see instructions) (a) Dividends received (b) % (c) Special deductions (a) (b) 1 Dividends from less-than-20%-owned domestic corporations (other than debt-financed stock) . . . . . . . . . . . . . . . . . . . . . . . . 2 Dividends from 20%-or-more-owned domestic corporations (other than debt-financed stock) . . . . . . . . . . . . . . . . . . . . . . . . 3 Dividends on debt-financed stock of domestic and foreign corporations . . . . . 4 Dividends on certain preferred stock of less-than-20%-owned public utilities . . . 5 Dividends on certain preferred stock of 20%-or-more-owned public utilities . . . . 6 Dividends from less-than-20%-owned foreign corporations and certain FSCs . . . 7 Dividends from 20%-or-more-owned foreign corporations and certain FSCs . . . 8 Dividends from wholly owned foreign subsidiaries . . . . . . . . . . . 9 Total. Add lines 1 through 8. See instructions for limitation . . . . . . . . 10 Dividends from domestic corporations received by a small business investment company operating under the Small Business Investment Act of 1958 . . . . . 11 Dividends from affiliated group members . . . . . . . . . . . . . . 12 Dividends from certain FSCs . . . . . . . . . . . . . . . . . 13 Dividends from foreign corporations not included on line 3, 6, 7, 8, 11, or 12 . . . 14 Income from controlled foreign corporations under subpart F (attach Form(s) 5471) . 15 Foreign dividend gross-up . . . . . . . . . . . . . . . . . . 16 IC-DISC and former DISC dividends not included on line 1, 2, or 3 . . . . . . 17 Other dividends . . . . . . . . . . . . . . . . . . . . . 18 Deduction for dividends paid on certain preferred stock of public utilities . . . . 19 Total dividends. Add lines 1 through 17. Enter here and on page 1, line 4 . . . 20 Total special deductions. Add lines 9, 10, 11, 12, and 18. Enter here and on page 1, line 29b . . . . . . . Form 1120 (2016) Form 1120 (2016) Page 3 Schedule J Tax Computation and Payment (see instructions) Part ITax Computation 1 Check if the corporation is a member of a controlled group (attach Schedule O (Form 1120)). See instructions 2 Income tax. Check if a qualified personal service corporation. See instructions . . . . . . . . 2 3 Alternative minimum tax (attach Form 4626) . . . . . . . . . . . . . . . . . . . . 3 4 Add lines 2 and 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5 a Foreign tax credit (attach Form 1118) . . . . . . . . . . . . . . 5a b Credit from Form 8834 (see instructions) . . . . . . . . . . . . . 5b c General business credit (attach Form 3800) . . . . . . . . . . . . 5c d Credit for prior year minimum tax (attach Form 8827) . . . . . . . . . 5d e Bond credits from Form 8912 . . . . . . . . . . . . . . . . 5e 6 Total credits. Add lines 5a through 5e . . . . . . . . . . . . . . . . . . . . . 6 7 Subtract line 6 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 Personal holding company tax (attach Schedule PH (Form 1120)) . . . . . . . . . . . . . . 8 9 a Recapture of investment credit (attach Form 4255) . . . . . . . . . . 9a b Recapture of low-income housing credit (attach Form 8611) . . . . . . . 9b c Interest due under the look-back methodcompleted long-term contracts (attach Form 8697) . . . . . . . . . . . . . . . . . . . . . . 9c d Interest due under the look-back methodincome forecast method (attach Form 8866) . . . . . . . . . . . . . . . . . . . . . . . 9d e Alternative tax on qualifying shipping activities (attach Form 8902) . . . . . 9e f Other (see instructionsattach statement) . . . . . . . . . . . . 9f 10 Total. Add lines 9a through 9f . . . . . . . . . . . . . . . . . . . . . . . . 10 11 Total tax. Add lines 7, 8, and 10. Enter here and on page 1, line 31 . . . . . . . . . . . . . 11 Part IIPayments and Refundable Credits 12 2015 overpayment credited to 2016 . . . . . . . . . . . . . . . . . . . . . . 12 13 2016 estimated tax payments . . . . . . . . . . . . . . . . . . . . . . . . 13 14 2016 refund applied for on Form 4466 . . . . . . . . . . . . . . . . . . . . . . 14 ( ) 15 Combine lines 12, 13, and 14 . . . . . . . . . . . . . . . . . . . . . . . . 15 16 Tax deposited with Form 7004 . . . . . . . . . . . . . . . . . . . . . . . . 16 17 Withholding (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . 17 18 Total payments. Add lines 15, 16, and 17 . . . . . . . . . . . . . . . . . . . . 18 19 Refundable credits from: a Form 2439 . . . . . . . . . . . . . . . . . . . . . . 19a b Form 4136 . . . . . . . . . . . . . . . . . . . . . . 19b c Form 8827, line 8c . . . . . . . . . . . . . . . . . . . 19c d Other (attach statementsee instructions). . . . . . . . . . . . . 19d 20 Total credits. Add lines 19a through 19d . . . . . . . . . . . . . . . . . . . . . 20 21 Total payments and credits. Add lines 18 and 20. Enter here and on page 1, line 32 . . . . . . . . 21 Schedule K Other Information (see instructions) 1 Check accounting method: a Cash b Accrual c Other (specify) Yes No 2 See the instructions and enter the: a Business activity code no. b Business activity c Product or service 3 Is the corporation a subsidiary in an affiliated group or a parent-subsidiary controlled group? . . . . . . . . . . If Yes, enter name and EIN of the parent corporation 4 At the end of the tax year: a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or tax-exempt organization own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporations stock entitled to vote? If "Yes," complete Part I of Schedule G (Form 1120) (attach Schedule G) . . . . . . b Did any individual or estate own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporations stock entitled to vote? If "Yes," complete Part II of Schedule G (Form 1120) (attach Schedule G) . Form 1120 (2016) Form 1120 (2016) Page 4 Schedule K Other Information (continued from page 3) Yes No 5 At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock entitled to vote of any foreign or domestic corporation not included on Form 851, Affiliations Schedule? For rules of constructive ownership, see instructions. If Yes, complete (i) through (iv) below. (i) Name of Corporation (ii) Employer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage Owned in Voting Stock b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If Yes, complete (i) through (iv) below. (i) Name of Entity (ii) Employer Identification Number (if any) (iii) Country of Organization (iv) Maximum Percentage Owned in Profit, Loss, or Capital 6 During this tax year, did the corporation pay dividends (other than stock dividends and distributions in exchange for stock) in excess of the corporations current and accumulated earnings and profits? See sections 301 and 316 . . . . . . . . If "Yes," file Form 5452, Corporate Report of Nondividend Distributions. If this is a consolidated return, answer here for the parent corporation and on Form 851 for each subsidiary. 7 At any time during the tax year, did one foreign person own, directly or indirectly, at least 25% of (a) the total voting power of all classes of the corporations stock entitled to vote or (b) the total value of all classes of the corporations stock? . . . . For rules of attribution, see section 318. If Yes, enter: (i) Percentage owned and (ii) Owners country (c) The corporation may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Enter the number of Forms 5472 attached 8 Check this box if the corporation issued publicly offered debt instruments with original issue discount . . . . . . If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. 9 Enter the amount of tax-exempt interest received or accrued during the tax year $ 10 Enter the number of shareholders at the end of the tax year (if 100 or fewer) 11 If the corporation has an NOL for the tax year and is electing to forego the carryback period, check here . . . . . If the corporation is filing a consolidated return, the statement required by Regulations section 1.1502-21(b)(3) must be attached or the election won't be valid. 12 Enter the available NOL carryover from prior tax years (don't reduce it by any deduction on line 29a.) $ 13 Are the corporations total receipts (page 1, line 1a, plus lines 4 through 10) for the tax year and its total assets at the end of the tax year less than $250,000? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If Yes, the corporation isn't required to complete Schedules L, M-1, and M-2. Instead, enter the total amount of cash distributions and the book value of property distributions (other than cash) made during the tax year $ 14 Is the corporation required to file Schedule UTP (Form 1120), Uncertain Tax Position Statement? See instructions . . . . If Yes, complete and attach Schedule UTP. 15a Did the corporation make any payments in 2016 that would require it to file Form(s) 1099? . . . . . . . . . . . b If Yes, did or will the corporation file required Forms 1099? . . . . . . . . . . . . . . . . . . . . 16 During this tax year, did the corporation have an 80% or more change in ownership, including a change due to redemption of its own stock? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 During or subsequent to this tax year, but before the filing of this return, did the corporation dispose of more than 65% (by value) of its assets in a taxable, non-taxable, or tax deferred transaction? . . . . . . . . . . . . . . . . . . 18 Did the corporation receive assets in a section 351 transfer in which any of the transferred assets had a fair market basis or fair market value of more than $1 million? . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 During the corporation's tax year, did the corporation make any payments that would require it to file Forms 1042 and 1042-S under chapter 3 (sections 1441 through 1464) or chapter 4 (sections 1471 through 1474) of the Code? . . . . . . . . Form 1120 (2016) Form 1120 (2016) Page 5 Schedule L Balance Sheets per Books Beginning of tax year End of tax year ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Assets (a) (b) (c) (d) 1 Cash . . . . . . . . . . . . 2a Trade notes and accounts receivable . . . b Less allowance for bad debts . . . . . 3 Inventories . . . . . . . . . . . 4 U.S. government obligations . . . . . 5 Tax-exempt securities (see instructions) . . 6 Other current assets (attach statement) . . 7 Loans to shareholders . . . . . . . 8 Mortgage and real estate loans . . . . . 9 Other investments (attach statement) . . . 10a Buildings and other depreciable assets . . b Less accumulated depreciation . . . . . 11a Depletable assets . . . . . . . . . b Less accumulated depletion . . . . . . 12 Land (net of any amortization) . . . . . 13a Intangible assets (amortizable only) . . . b Less accumulated amortization . . . . . 14 Other assets (attach statement) . . . . . 15 Total assets . . . . . . . . . . Liabilities and Shareholders Equity 16 Accounts payable . . . . . . . . . 17 Mortgages, notes, bonds payable in less than 1 year 18 Other current liabilities (attach statement) . . 19 Loans from shareholders . . . . . . . 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement) . . . . 22 Capital stock: a Preferred stock . . . . b Common stock . . . . 23 Additional paid-in capital . . . . . . . 24 Retained earningsAppropriated (attach statement) 25 Retained earningsUnappropriated . . . 26 Adjustments to shareholders equity (attach statement) 27 Less cost of treasury stock . . . . . . 28 Total liabilities and shareholders equity . . Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books . . . . . . 2 Federal income tax per books . . . . . 3 Excess of capital losses over capital gains . 4 Income subject to tax not recorded on books this year (itemize): 5 Expenses recorded on books this year not deducted on this return (itemize): a Depreciation . . . . $ b Charitable contributions . $ c Travel and entertainment . $ 6 Add lines 1 through 5 . . . . . . . . 7 Income recorded on books this year not included on this return (itemize): Tax-exempt interest $ 8 Deductions on this return not charged against book income this year (itemize): a Depreciation . . $ b Charitable contributions $ 9 Add lines 7 and 8 . . . . . . 10 Income (page 1, line 28)line 6 less line 9 Schedule M-2 Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L) 1 Balance at beginning of year . . . . . 2 Net income (loss) per books . . . . . . 3 Other increases (itemize): 4 Add lines 1, 2, and 3 . . . . . . . . 5 Distributions: a Cash . . . . b Stock . . . . c Property . . . 6 Other decreases (itemize): 7 Add lines 5 and 6 . . . . . . 8 Balance at end of year (line 4 less line 7) Form 112