3-66 TAX FORM/RETURN PREPARATION PROBLEMS 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-2021019. The company incorporated on December 31, 2015, and began business on January 2, 2016. Table 6:3-3 contains balance sheet information at January 1, 2019, and December 31, 2019. Table C:3-4 presents an unaudited GAAP income state- ment for 2019. These schedules are presented on a book basis. Other information follows the tables. TABLE C:3-3 Melodic Musical Sales, Inc. -Book Balance Sheet Information January 1, 2019 December 31, 2019 Account Debit Credit Debit Credit I Cash Accounts receivable Allowance for doubtful accounts Inventory Investment in corporate stock Investment in municipal bonds Cash surrender value of insurance policy Land Buildings Accumulated depreciation Buildings Equipment Accumulated depreciation Equipment Trucks Accumulated depreciation--Trucks Accounts payable Notes payable (short-term) Accrued payroll taxes Accrued state income taxes Accrued federal income taxes Bonds payable long-term Net deferred tax liability Capital stod-Common Retained earnings-Unappropriated Totals $ 516,774 $ 815,494 400,000 500,000 $ 20,000 $ 25,000 2,500,000 3,500,000 260,000 50,000 30,000 30,000 60,000 80,000 200,000 200,000 2,000,000 2,000,000 100,000 140,000 750,000 1,100,000 187,500 205,000 100,000 100,000 30,000 50,000 300,000 270,000 300,000 640,000 14,880 18,600 4,500 7,500 2,500 77,361 1,000,000 600,000 57,394 167.593 1.500.000 1,500,000 2,000,000 4,674,440 56,016,774 56,816,774 59,375,494 53,375,494 3-62 Line 9 (a) Check (in) (b), (e) & (d) Not applicable (e) & (6) No Compensation of Officers (Form 1125-E): la) (b) Mary Travis XXX-XX-XXXX 100% 50% $290,000 John Willis XXX-XX-XXXX 100% 25% 180,000 Chris Parker XXX-XX-XXXX 100% 25% 180,000 Total $650,000 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 2019, the corporation charged $40,000 to the allowance account, such amount represent- ing actual writeoffs for 2019. 16-23 Additional Information (Schedule K): 1b Accrual Fill in the correct amount 2 a 451140 10 3 b Retail sales 11 Do not check box c Musical instruments 12 Not applicable 3 No 13-14 No No 15 a No b Yes, omit Schedule G b Do not check box S a No No b No 24 No 6-7 No 25 No 8 Do not check box Organizational Expenditures: The corporation incurred less than 55,000 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 ex- penditures 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 8, 2019, for $145,000. The corporation acquired the stock on December 14, 2018, for $90,000 The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2019, for $110,000. The corporation acquired this stock on September 18, 2017, for $120,000. The corporation has a $15,000 capital loss carryover from 2018. 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 tracks, 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 13 and C:3-4 reflect these calculations For tax purposes All assets are MARS property as follows store building. 19-year monsi dential real property equipment, seven-year property and tracks, five-year property. The corporation acquired the store building for $2 million and placed it in een mary 2, 2016. The corporation acquired two pieces of equipment for S250.000 Equipement 1) and 550.000 Equipment 2) and placed thimin The Corporate Income Tax Corporations 3-63 The corporation did not make the expensing election under Sec. 179 or take bonus deprecia- tion on any property acquired before 2019. Accumulated tax depreciation through Decem ber 31, 2018, on these properties is as follows: Store building $ 151,780 Equipment 1 140,675 Equipment 2 281,350 Trucks 52,000 On October 16, 2019, the corporation sold for $280,000 Equipment 1 that originally cost $250,000 on January 2, 2016. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2019, the corporation acquired and placed in service a piece of equipment costing $600,000. Assume these two transactions do not qualify as a like-kind exchange. The new equipment is seven-year property. The corpora- tion made the Sec. 179 expensing election with regard to the new equipment for the entire cost of this property. Where applicable, use published IRS depreciation tables to compute 2019 depreciation (reproduced in Appendix C of this text). Other Information: Ignore the accumulated earnings tax. The corporation received dividends (see Income Statement in Table C:3-4) from tax able, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20% The corporation paid $100,000 in cash dividends to its shareholders during the year The state income tax in Table 3-4 is the exact amount of such taxes incurred during The corporation is not entitled any credits. Ignore the financial statement impact of any underpayment penalties incurred on the tax return Required. Prepare the 2019 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 Form 8916-A) and Sched ule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3. Note to Instructor. See solution in the Instructor's Resource Manual for other optional information to provide to students. the year 3-66 TAX FORM/RETURN PREPARATION PROBLEMS 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-2021019. The company incorporated on December 31, 2015, and began business on January 2, 2016. Table 6:3-3 contains balance sheet information at January 1, 2019, and December 31, 2019. Table C:3-4 presents an unaudited GAAP income state- ment for 2019. These schedules are presented on a book basis. Other information follows the tables. TABLE C:3-3 Melodic Musical Sales, Inc. -Book Balance Sheet Information January 1, 2019 December 31, 2019 Account Debit Credit Debit Credit I Cash Accounts receivable Allowance for doubtful accounts Inventory Investment in corporate stock Investment in municipal bonds Cash surrender value of insurance policy Land Buildings Accumulated depreciation Buildings Equipment Accumulated depreciation Equipment Trucks Accumulated depreciation--Trucks Accounts payable Notes payable (short-term) Accrued payroll taxes Accrued state income taxes Accrued federal income taxes Bonds payable long-term Net deferred tax liability Capital stod-Common Retained earnings-Unappropriated Totals $ 516,774 $ 815,494 400,000 500,000 $ 20,000 $ 25,000 2,500,000 3,500,000 260,000 50,000 30,000 30,000 60,000 80,000 200,000 200,000 2,000,000 2,000,000 100,000 140,000 750,000 1,100,000 187,500 205,000 100,000 100,000 30,000 50,000 300,000 270,000 300,000 640,000 14,880 18,600 4,500 7,500 2,500 77,361 1,000,000 600,000 57,394 167.593 1.500.000 1,500,000 2,000,000 4,674,440 56,016,774 56,816,774 59,375,494 53,375,494 3-62 Line 9 (a) Check (in) (b), (e) & (d) Not applicable (e) & (6) No Compensation of Officers (Form 1125-E): la) (b) Mary Travis XXX-XX-XXXX 100% 50% $290,000 John Willis XXX-XX-XXXX 100% 25% 180,000 Chris Parker XXX-XX-XXXX 100% 25% 180,000 Total $650,000 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 2019, the corporation charged $40,000 to the allowance account, such amount represent- ing actual writeoffs for 2019. 16-23 Additional Information (Schedule K): 1b Accrual Fill in the correct amount 2 a 451140 10 3 b Retail sales 11 Do not check box c Musical instruments 12 Not applicable 3 No 13-14 No No 15 a No b Yes, omit Schedule G b Do not check box S a No No b No 24 No 6-7 No 25 No 8 Do not check box Organizational Expenditures: The corporation incurred less than 55,000 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 ex- penditures 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 8, 2019, for $145,000. The corporation acquired the stock on December 14, 2018, for $90,000 The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2019, for $110,000. The corporation acquired this stock on September 18, 2017, for $120,000. The corporation has a $15,000 capital loss carryover from 2018. 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 tracks, 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 13 and C:3-4 reflect these calculations For tax purposes All assets are MARS property as follows store building. 19-year monsi dential real property equipment, seven-year property and tracks, five-year property. The corporation acquired the store building for $2 million and placed it in een mary 2, 2016. The corporation acquired two pieces of equipment for S250.000 Equipement 1) and 550.000 Equipment 2) and placed thimin The Corporate Income Tax Corporations 3-63 The corporation did not make the expensing election under Sec. 179 or take bonus deprecia- tion on any property acquired before 2019. Accumulated tax depreciation through Decem ber 31, 2018, on these properties is as follows: Store building $ 151,780 Equipment 1 140,675 Equipment 2 281,350 Trucks 52,000 On October 16, 2019, the corporation sold for $280,000 Equipment 1 that originally cost $250,000 on January 2, 2016. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2019, the corporation acquired and placed in service a piece of equipment costing $600,000. Assume these two transactions do not qualify as a like-kind exchange. The new equipment is seven-year property. The corpora- tion made the Sec. 179 expensing election with regard to the new equipment for the entire cost of this property. Where applicable, use published IRS depreciation tables to compute 2019 depreciation (reproduced in Appendix C of this text). Other Information: Ignore the accumulated earnings tax. The corporation received dividends (see Income Statement in Table C:3-4) from tax able, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20% The corporation paid $100,000 in cash dividends to its shareholders during the year The state income tax in Table 3-4 is the exact amount of such taxes incurred during The corporation is not entitled any credits. Ignore the financial statement impact of any underpayment penalties incurred on the tax return Required. Prepare the 2019 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 Form 8916-A) and Sched ule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3. Note to Instructor. See solution in the Instructor's Resource Manual for other optional information to provide to students. the year