As the newest member on the corporate tax department team, the senior partner

assigns you to prepare corporate tax returns for Mikes Sporting Goods, Inc.

Mikes Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes

and clothing to sports teams at the college level. The company was originally

started by Mike Jones and three guys he met while attending UMUC, all of whom

were state champions in various sports. Juan Delaross was a swimmer who won

the state championship with his killer butterfly stroke in the 100-meter fly. Elroy

Mulcane was the college champion in golf and Scott Barnett was the state

cycling champion three years in a row. Mike won the state championship as a

sprinter all four years of college.

Starting the company was Mikes idea, he owns the largest percentage of stock,

and is the only owner who works in the business. The other three investors

brought money to the table, but never planned on working in the sporting goods

store. Therefore, no one questioned Mike when he suggested naming the

corporation Mikes Sporting Goods, Inc. In addition, Mike has always had a

strong desire to be known as the big guy on campus even after graduation.

Location

As the old saying goes, Location, location, location. Luckily, Juan is a

commercial real estate broker with a reputation for finding the perfect location for

small businesses. After showing the location to the other investors, everyone

agreed it would attract their target market of young athletic enthusiasts. As

corporate officers, Mike and Juan signed a ten-year lease that required $9,200

per year in rent.

The building was built just a few years ago, so minimal expense was projected

for maintenance and repairs. In 20Y5, Mike kept repairs expense down to $800,

which really pleased Juan, Elroy, and Scott.

Corporate investments

During 20Y5, Mikes Sporting Goods, Inc. received the following investment

incomes:

! Interest from its own Accounts Receivables = $1,500

! Interest from corporate bonds = $4,000

! Interest from tax-exempt state bonds = $5,000

! Dividends from various U.S. corporations = $10,000

o Mikes Sporting Goods, Inc. owns 20% of the stock of one

corporation

Since Mikes Sporting Goods, Inc. did not have a net operating loss, its only entry

on line 29 is the dividends-received deduction of $8,000 from Schedule C, page

2.

Year-end 20Y5, includes a $3,600 capital losses from the sale of securities.

Revenue from Sales

The corporation, which uses an accrual basis of accounting on a calendar year,

brought in $2,910,000 in gross sales in 20Y5. Just less than 1% of gross sales

were returned, thus bringing net sales to $2,890,000. Thanks to Mikes

purchasing savvy, cost of goods sold was $2,050,000, which is less than the

industry standard of 80% of sales.

Other Expenses:

Advertising

While the stockholders had intended on spending more on advertising,

Mike only spent $8,700 and most of it was in Website development.

Bad debt expense

The corporation uses the specific account write off method for

uncollectible accounts receivable. A total of $1,600 in accounts receivable

were written off in 20Y5.

Charitable contributions

During the year, Mikes Sporting Goods, Inc. contributed $11,400 to the

UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic

Scholarship Fund.

Depreciation

On Line 8(a) of the Schedule M of the 1120, Mikes Sporting Goods, Inc.

reports the difference between the depreciation claimed on the tax return

and the depreciation shown on the corporation's books.

Total depreciation from Form 4562 (not illustrated) is $17,600. $12,400 is

included as cost of goods sold in Line 5 of the Form 1125-A. Enter the

balance of $5,200 on line 20. Book Depreciation is $15,980.

Interest expense:

Mikes Sporting Goods, Inc. incurs interest expense on debt to finance

operations and to buy investments when a deal is just too good to pass

up. Elroy is a securities broker with a national brokerage firm, therefore

he handles all corporate investments. In 20Y5, the corporation accrued

$27,200 in interest expense plus $850 in interest on notes used to carry

tax-exempt state bonds.

Salaries

When the corporation was first formed, the four corporate officers agreed

to keep their salaries low for the first five years to allow the business to

grow. Thus, they agreed to pay Mike $55,000 per year, since he will

manage the store, and $5,000 per year to the other stockholders.

Thereby, total officers salaries will be $70,000 per year for the first five

years. Hint: use Schedule E.

Since Mike will be handling the ordering, inventory management, and

other administrative tasks, all employees will be in sales. Given the nature

of sporting goods stores, everyone agreed the staff should be college

students currently attending UMUC. Their goal was to keep wages below

$50,000 per year. In 20Y5, Mike managed to keep total wages at

$44,000.

All other expenses

All other expenses of operating Mikes Sporting Goods, Inc. totals

$78,300. These expenses include legal fees, office expenses, and sales

commissions. Attach a schedule that itemizes these expenses to the

return.

Taxes and credits

Taxes:

At December 31, 20Y5, the corporation had $55,387 in accrued federal

income taxes.

Mikes Sporting Goods, Inc. made four estimated tax payments totaling

$69,117 as follows:

! $17,280 on 4/15/20Y5

! $17,280 on 6/15/20Y5

! $17,280 on 9/15/20Y5

! $17,871 on 1/15/20Y6

See the cancelled checks in Appendix F.

Tax Credits:

The work opportunity credit is an incentive to hire persons from groups

with a particularly high unemployment rate or other special employment

needs. Given the high unemployment rate of college students, Mikes

Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit. Hint:

use Form 5884. The credit will then carry over to the Schedule J of the

1120.

Reconciling Book to Return:

Mikes Sporting Goods, Inc. has the following non-deductible expenses on its

Income Statement Per Books:

Premiums paid on term life insurance on corporate officers $9,500

Interest paid to purchase tax-exempt state bonds 850

Nondeductible contributions 500

Reduction of salaries by work opportunity credit 6,000

Total $16,850

Deductible state and local taxes (not federal income tax) totaled $15,000

If Mikes Sporting Goods, Inc. owes income tax, the corporation will mail a check;

if, otherwise, credit any overpayment to next years estimated taxes.

III. Steps to Completion:

Prepare IRS Form 1120

1. Prepare Schedules M-1: Reconciliation of Income (Loss) per Books with

Income per Return using financial data in the Appendices.

2. Prepare Schedule M-2: Analysis of Unappropriated Retained Earnings per

Books using financial data in the Appendices.

IV. Deliverables:

The following forms and schedules, combined as a single PDF document, are

required:

! Form 1120

! Form 4562: Depreciation and Amortization

! Schedule C: Total Special Deductions

! Schedule D: Net Long-Term Capital Gains or Losses

! Schedule J: Total Tax

! Schedule J: Total Payments and Credits

! Schedule K: Accuracy

! Schedule L: End of Tax Year: Total Liabilities and Stockholders Equity

! Form 8949: Totals for Proceeds, Basis, & Gain/Loss

! Form 1125-A: Total for Cost of Goods Sold

! Form 3800: General Business Credit: Credit Allowed for the Current Year

! M-1 Income

! M-2 Balance at End of Year

! In addition, each student must separately submit their Group Contribution

Report in their Assignment folder.

Appendices: Table of Contents

Appendix A: Basic corporate information

Appendix B: List of select Accounts and Balances per Book

o (Financial basis, NOT tax basis)

Appendix C: Income Statement per Books

o (Financial basis, not tax)

Appendix D: Comparative Balance Sheet per Books

o (Financial basis, not tax)

Appendix E: General Ledger Retained Earnings account in T-account

format.

Appendix F: Cancelled checks to the Internal Revenue Service for

estimated quarterly tax payments

APPENDIX A: Basic corporate information

Corporate Name Mikes Sporting Goods, Inc.

Corporate Address 422 Bruce Lane

Annapolis, MD 21401

Federal Tax ID 52-9746858

Corporate officers:

President/CEO Michael S. Duke

Vice President Juan Delaross

Treasurer Elroy Mulcane

Secretary Scott Barnett

APPENDIX B: List of select Accounts and Balances per Book (financial-basis,

not tax basis). Account balances may or may not be reported on Form 1120.

Hint: You will need these items to prepare Schedule M of the 1120.

Account Account Balance

Advertising 8,700

Bad debts 1,600

Charitable Contributions to Not-for-Profit organizations 24,000

Charitable Contributions to political campaigns 500

Compensation of officers 70,000

Cost of goods sold 2,050,000

Depreciation--indirect 3,580

Dividends received 10,000

Federal income tax accrued 55,387

Interest expense on note to buy tax-exempt state bonds 850

Interest expense on note to buy corporate bonds 27,200

Interest income on tax exempt state bonds 5,000

Interest income on taxable corporate bonds 5,500

Loss on securities 3,600

Maintenance and Repairs 800

Net income per books after tax 517,783

Other operating expenses 78,300

Premiums on life insurance 9,500

Proceeds from life insurance 9,500

Rental expense 9,200

Salaries and wages--indirect 44,000

Sales - gross 2,910,000

Sales returns and allowances 20,000

State and Local Taxes 15,000

APPENDIX C: Income Statement per Book (financial, not tax)

Mikes Sporting Goods, Inc.

Income Statement (per Books)

Year ending 20Y5

Revenue:

Gross sales $ 2,910,000

Less: Returns & allowances 20,000

Net sales 2,890,000

Cost of goods sold 2,050,000

Gross Margin 840,000

Operating expenses:

Advertising 8,700

Bad debt 1,600

Charitable contributions:

Deductible 24,000

Non-deductible 500 24,500

Depreciation 3,580

Equipment rental 9,200

Life insurance 9,500

Maintenance & repairs 800

Officers compensation 70,000

Salaries and wages 44,000

Total operating expenses 171,880

Operating Income 668,120

Other revenue and gains:

Dividend income 10,000

Interest income: Maryland bonds 5,000

Interest income: All other bonds 5,500

Proceeds from life insurance 9,500

Total other revenue and gains 30,000

Other expenses and losses:

Accrued federal income taxes 55,387

Other operating expenses 78,300

Loss on investments 3,600

Total other expenses and losses 137,287

Total income before interest and taxes 560,833

Interest expense on note to purchase taxexempt

bonds

850

Interest expense on all other notes 27,200 28,050

Income before tax 532,783

Less: State & Local Income tax 15,000

Net income per books after tax 517,783

APPENDIX D: Comparative Balance Sheet per Books (financial, not tax)

Mikes Sporting Goods, Inc.

Balance Sheet per Books

December 31, 20Y4 and 20Y5

Year Ending 20Y4 Year ending 20Y5

Assets

Cash 114,700 329,564

Accounts receivable (net) 98,400 235,001

Inventory 426,000 495,479

Tax-exempt securities 100,000 120,000

Other current assets 26,300 17,266

Other investments 100,000 80,000

Buildings 272,400 296,700

Accumulated depreciation 88,300 184,100 104,280 192,420

Land 20,000 20,000

Other assets 14,800 19,300

Total assets 1,084,300 1,509,030

Liabilities & Stockholders Equity

Accounts payable 428,500 334,834

Notes payable (short term) 4,300 4,300

Other current liabilities 6,800 7,400

Notes payable (long term) 176,700 264,100

Stockholders Equity

Common stock 200,000 200,000

Retained earnings: Appropriated 30,000 40,000

Retained earnings: Unappropriated 238,000 658,396

Total liabilities & Stockholders

equity 1,084,300 1,509.030

APPENDIX E: General ledger Retained Earnings account in T-account

format

General Ledger

Retained Earnings Account

Explanations: Debits Credits Explanations:

Contingencies 10,000 238,000 Beg balance

Accrued income tax 55,387 532,783 Net Income before tax

Dividends paid 65,000 18,000 Income tax refund

Ending balance 658,396

APPENDIX F: Canceled checks

Canceled checks Only Complete Form 8949