ACC302 Spring 2020 TAX RETURN ASSIGNMENT

WEGOTTHIS INC ("WGT")was formed in early 2019, owned by an Italian pharma

company Erbamont ("Erba") which was famous for developing Adriamycin, an anti-cancer drug.

Erbamont thought inventing a cure for Covid 19 would be incredible for humanity and finacially as well. Erbamont owns 80% of the WGT company stock and the other 20% is owned by the top five officers of the Corporation (each hold 2%).WGT is, of course, incorporated in Delaware.

WGT was poised to run Erba's new anti-Covid drug trhu FDA staged approval process.WGT rents offices and labs in Maryland, close to DC.WGT was incorporated, in Delaware, on 1/1/2019, somehow anticipating that this virus would strike the USA.Someone had some key information of the coming pandemic.

WGT somehow was tipped off to the potential for a catastrophic virus that was rumored to be causing early stage havoc in China.

WGT acts as the service provider for Erba, its parent, running FDA"tests" to fast track approval of this drug.They have a number of labs in multiple states working concurrently.

Erba and WGT deal at arm's length in all transactions.Erba pays WGT significant fees (based on costs plus 40%). Erba supplies all materials to WGT for use in the FDA process.Business is booming.

WGT has engaged our firm - this class- to do its tax return for 2019.Here's what they gave me for their 2019 first year of operations-

Financial Statement -Income Statement for year ended 12/31/2019 shows -

Gross Service Fees $112 million.

Cost of Providing Services$80 million.

Interest income $1 million.

Dividend Income $3 million (small 15% investment in TRUMP CORP).

Loss on sale of New York bonds - $(1 million).

Net Profit Pre Tax is $35 million.

Tax per Books was 7 million.

Net profit after tax was $28 million.

Breakdown of Costs of Providing Services-

Selling, Service and marketing costs - Bribes to Local Hospital Officials $1 million; Bribes to 4 US Senators $2 million (each guy got $500,000 for helping WGTbecome the "leading supplier of virus tests!"); Bribes to state government official who were encouraged to practice speeches they would use to hype up demand for the new Erba drug - 6 states - total bribes $6 million.Payoffs to officials in China - block off potential early stage solutions the Chinese offered to provide to USA -$5 million in total! Bribes to FDA officials to help fast track things - $2 million.Fine levied by the US government against WGT was $5 million under the Foreign Corrupt Practice Act for bribing those foreign countries!Ughh!Advertising costs - $5,000,000.Sales commissions to employees $1,500,000.Salaries to salespeople- $5 million.

Administration and operating costs -Officer Comp $5 million (each officer got $1 million!); Fringe benefits - $1 million; Pensions, etc - $1 million; Other salaries - lab workers -$5 million; Entertainment $800,000; Meals $400,000 (assume 1/2 of these meals can be deducted for tax purposes); Fees to Lobbyists - $300,000; Other buildings/labs - 5 labs at $200,000 annual rent EACH facility.Donations to various universities (keep those science professors happy!) - $200,000.State tax and local license expenses $300,000. Start up costs $41,000; Miscellaneous other costs - $459,000.Depreciation - 100% bonus depreciation was taken on all the testing equipment owned by WGT - $5 million.Book depreciation was $1 million on these assets, since the company estimated a 5 year life on these assets that cost $5 million. Permits - $3 million.Insurance - $6 million.Rental - Company headquarters - Manhattan Trump Tower - Floor 52 - $16 million.CPA and Attorney fees - $6 million.

Breakdown of Other things?

The interest income of $1 million included $500,000 from an investment in State of California Bonds and another $400,000 from investment in State of New York Bonds.The balance of $100,000 was interest received from an investment into a Russian Bank.

The New York bonds were sold on 12/25/19 at a $1 million loss.

Also, they told me they paid a $2 million dividend - $1.6 to Erba, it's Italian parent company, and the remaining $400,000 was paid $80,000 to each of the 5 officers.Paid on Christmas day - 12/25/2019.

Erba was funded significantly by Banco De Milano (75% investment); the other 25% was from its IPO in late 2018 on the Italian Stock Exchange.Erba prepares all its Financial Statements under current IFRS (International Financial Reporting Standards).

Finally - WGT PAID NO TAX to the FEDERAL GOVERNMENT in the USA - at least not NYET!BUT they did pay that state tax I mentioned above!

I think they hoped to be granted a federal tax exemption by their friends in Congress - sort of like a "bail out!"- it's rumored that a tax bill is circulating that will grant a 50% tax credit to -

"all US subsidiaries that are headquartered in New York City, incorporated in Delaware, and are owned 80% or more by an Italian Parent Companies, and only when the US company engages in FDA fast track approval process for drugs related to combating Covid-19, and only when said work is performed at no less than nor no more than 5 facilities in 5 states that employ at least 25 employees or "full time equivalents," at each facility, and who are earning no less than $40,000 per worker."

Time will tell if this tax bill will pass (I obtained the draft language about from a friend of a friend of a friend)....but at least we know that it will not apply to 2019, unless Congress makes it retroactive.

THAT'S ALL I GOT FOR NOW!

Can you use this data and -

1.Complete the Schedule M-1 (feel free to do it on that Excel Spreadsheet I gave you!)

2.Tell me what Line 28 of Page 1 of the Tax Return Form 1120 should be. Again, use the Use Excel Spreadsheet to compute this - line by line.

3.Tell me what Line 30 of same page should be.

4.Tell me how much they will owe in tax?

5.Looking at the Form 1120 - Pages 1 to 6 -Let me know what other detail you might need?I'll be gathering up some more info, such as who the officers are, etc, etc.Email me ANY questions.

Need the above REAL FAST - LIKE YESTERDAY!Recall - this assignment is worth about 15% of your grade but, more importantly, could lead to a great future in the world of accounting and tax (or you might want to change your mind and go into a medical school, or even better - go into politics!)

AND THIS IS THE EXCEL FILE

WGT TAX RETURN 2019 Tax year Working from F/S to Tax Return - Line on Tax Return 1 Sales Returns Balance 2 Cost of Sales 3 GP 4 Dividends 5 Interest 6 Rents 7 Royalties 8 Cap Gain (loss) 9 4797 Gain 10 Other Income 11 Total Income 12 Officer Comp 13 S & W 14 R & M 15 Bad Debts 16 Rents 17 Taxes 18 Interest 19 Contribs 20 Deprec 21 Deplet 22 Advertising 23 Pensions 24 Benefits 25 Reserved 26 Other - (list) 27 TOTAL DEDS 28 TI B4 NOL and Spec Deducts See Page 1 of the Form 11 www.IRS.gov Amount per Financial Stmt Schedule M-1 Balance Per T/R 29 Special Deductions DRD 30 Taxable Income 31 Tax (See Sch J) 32 Tax Already Paid ? 35 Balance Due 36 Overpaid ACC302 Spring 2020 TAX RETURN - WGT SCHEDULE M-1 - Get from Financials to Tax Return! See Form M-1 on Page 6 of Form 1120) AMOUNT? 1 NP AFTER Tax 2 Add - Tax on F/S 3 Excess of Capital losses over Capital Gains 4 Income subject to tax not recorded on books (list) 5 Expenses recorded on books not deducted this year (list) 6 Total Lines 1 to 5 7 Income recorded on books not in taxable income this year (list) 8 Deductions on this return not charged against book income (list) 9 Total Lines 7 and 8 10 Income (Line 6 less Line 9) (Page 1, Line 28) 0 0 ACC302 Spring 2020 TAX RETURN ASSIGNMENT WEGOTTHIS INC ("WGT") was formed in early 2019, owned by an Italian pharma company Erbamont ("Erba") which was famous for developing adriamycin. Erbamont thought inventing a cure for Covid 19 would be incredible for humanity and finacially as well. Erbamont owns 80% of the WGT company stock and the other 20% is owned by the top five officers of the Corporation (each hold 2%). WGT is, of course, incorporated in Delaware. WGT was poised to run Erba's new anti-Covid drug trhu FDA staged approval process. WGT rents offices and labs in Maryland, close to DC. WGT was incorporated, In Delaware, on 1/1/2019, somehow anticipating that this virus would strike the USA. Someone had some key information of the coming pandemic. WGT somehow was tipped off to the potential for a catastrophic virus that was rumored to be causing early stage havoc in China. They act as the service provider for Erba, its parent. running FDA \"tests\" to fast track approval of this drug. They have a number of labs in multiple states working concurrently. Erba and WGT deal at arm's lenght in all transactions. Erba pays WGT signifigant fees (based on costs plus 40%). Erba suppies all materials to WGT for use in the FDA process. Business is booming. WGT has engaged our firm - this class- to do its tax return for 2019. Here's what they gave me for their 2019 first year of operations- Financial Statement - Income Statement for year ended 12/31/2019 shows - Gross Service Fees $112 million. Cost of Providing Services $80 million. Interest income $1 million. Dividend Income $3 million (small 15% investment in TRUMP CORP). Loss on sale of New York bonds - $(1 million). Net Profit Pre Tax is $35 million. Tax per Books was 7 million. Net profit after tax was $28 million. Breakdown of Costs of Providing Services - Selling, Service and marketing costs - Bribes to Local Hospital Officials $1 million; Bribes to 4 US Senators $2 million (each guy got $500,000 for helping WGT become the \"leading supplier of virus tests!"); Bribes to state government official who were encouraged to practice speeches they would use to hype up demand for the new Erba drug - 6 states - total bribes $6 million. Payoffs to officials in China - block off potential early stage solutions the Chinese offered to provide to USA - $5 million in total! Bribes to FDA officals to help fast track things - $2 million. Fine levied by the US government against WGT was $5 million under the Foreign Corrupt Practice Act for bribing those foreign countries! Ughh! Advertising costs - $5,000,000. Sales commissions to employees $1,500,000. Salaries to salespeople- $5 million. Administration and operating costs -Officer Comp $5 million (each officer got $1 million!); Fringe benefits - $1 million; Pensions, etc - $1 million; Other salaries - lab workers - $5 million; Entertainment $800,000; Meals $400,000 (assume 1/2 of these meals can be deducted for tax purposes); Fees to Lobbyists - $300,000; Other builidings/labs - 5 labs at $200,000 annual rent EACH facility. Donations to various universities (keep those science professors happy!) $200,000. State tax and local license expenses $300,000. Start up costs $41,000; Miscellaneous other costs $459,000. Depreciation - 100% bonus depreciation was taken on all the testing equipment owned by WGT - $5 million. Book depreciation was $1 million on these assets. since the company estimated a 5 year life on these assets that cost $5 million. Permits - $3 million. Insurance - $6 million. Rental - Company headquarters - Manhattan Trump Tower - Floor 52 - $16 million. CPA and Attorney fees - $6 million. Breakdown of Other things? The interest income of $1 million included $500,000 from an investment in State of California Bonds and another $400,000 from investment in State of New York Bonds. The balance of $100,000 was interest received from an investment into a Russian Bank. The New York bonds were sold on 12/25/19 at a $1 million loss. Also, they told me they paid a $2 million dividend - $1.6 to Erba, it's Italian parent company, and the remaining $400,000 was paid $80,000 to each of the 5 officers. Paid on Christmas day - 12/25/2019. Erba was funded significantly by Banco De Milano (75% investment); the other 25% was from its IPO in late 2018 on the Italian Stock Exchange. Erba prepares all its Financial Statements under current IFRS (International Financial Reporting Standards). Finally - WGT PAID NO TAX to the FEDERAL GOVERNMENT in the USA - at least not NYET! BUT they did pay that state tax I mentioned above! I think they hoped to be granted a federal tax exemption by their friends in Congress - sort of like a \"bail out!\"- it's rumored that a tax bill is circulating that will grant a 50% tax credit to all US subsidiaries of Italian Parent Companies when the US company engages in FDA fast track approval process for drugs related to combating Covid-19,, when said work is performed at no less than nor no more than 5 facilities in 5 states that employ at least 25 employees or "full time equivalents" earning no less than $40,000 per worker. Time will tell if this tax bill will pass....but at least we know that it will not apply to 2019, unless Congress makes it retroactive. THAT'S ALL I GOT FOR NOW ! Can you use this data and - 1. Complete the Schedule M-1 (feel free to do it on that Excel Spreadsheet I gave you!) 2. Tell me what Line 28 of Page 1 of the Tax Return Form 1120 should be. Again, use the Excel Spreadsheet to c 3. Tell me what Line 30 of same page should be. 4. Tell me how much they will owe in tax? 5. Looking at the Form 1120 - Pages 1 to 6 - Let me know what other detail you might need? I'll be gathering up some more info, such as who the officers are, etc, Email me ANY questions. Need the above REAL FAST - LIKE YESTERDAY! Recall - this assignment is worth about 15% of your grade but, more importantly, could lead to a great future in the world of accounting and tax (or you might want to change your mind and go the medical school, or even better - go into politics!) el Spreadsheet to compute this - line by line. WGT 2019 Year ANALYSIS of TAX PER BOOKS/Financial Statement CURRENT Net Profit BEFORE TAX EXPENSE (Financial Statement) SCH M's - List Timing Permanent Permanent Permanent Permanent Timing Permanent Permanent Total Tax Corrected Tax entry? Dr Current Tax Expense Cr Current Tax Liability To record corrected current tax expense and liability for 2019 Dr Deferred Tax Expense Cr Deferred Tax Liability To record corrected deferred tax expense and liability for 2019 Net Profit BEFORE TAX EXPENSE (Financial Statement) Less - Current Tax Expense Less - Deferred Tax Expense NET PROFIT AFTER TAX (as adjusted post Financial Statement CPA AUDIT firm MANAGEMENT COMMENTS) NET PROFIT AFTER TAX PER ORIGINAL FIN STATEMENT Note - We would also propose an adjusting entry to reverse whatever entries the client made when it booked its origin $__________ on its 2019 books! DEFERRED lient made when it booked its original tax expense of