Background & Facts Gloria Delgado and Cameron Tucker each own a chocolate factory in the State of Wyoming. Gloria has owned and managed various businesses in the chocolate industry for over 30 years. Gloria started her current chocolate factory roughly 20 years ago, and her factory is the predominant chocolate factory in the northern part of the state. Cameron earned an M.B.A. from Fordham University and has 15 years of experience in chocolate factory management. He began his chocolate factory only five years ago and in that short time has captured 35 percent of the chocolate market in the southern part of the state." Cameron has also developed a software program tailored to meet the accounting, billing, and reporting requirements of chocolate factories. Because of the unique and complex billing requirements of chocolate factories, the software is expected to be a substantial revenue producer once it is marketed to its full potential. Confident of the success of his software program, Cameron borrowed $400,000 from Grand Teton National Bank to cover the cost of developing the program. Cameron began marketing the software only 18 months ago and it has been very well received by the industry. Cameron is concerned that without add capital for the software venture that will not be able to provide the training and technical support that the licensees of the software will demand. Therefore, he has limited the number of licenses that he has issued for the software to 75 customers until he is able to expand his support capabilities. Cameron realizes the software will soon lose its competitive advantage in the market unless he is able to move quickly to market the product to its full potential. Gloria and Cameron, both Fordham graduates, met several years ago at an alumni event and became fast friends. They have discussed their vision of a national chocolate factory for the past couple of years. A few months ago, they decided that with Gloria's years of experience and access to capital, and Cameron's management capabilities and contacts in the chocolate industry, they would be perfect business partners. After months of negotiation, Gloria and Cameron agreed to combine their chocolate factories to form Yellowstone Chocolate, Inc. (YCI). Andy Bailey, who has been one of Gloria's most valuable employees in his various business ventures for nearly 30 years, would like to have an ownership interest in YCl. Given Andy's dedication and loyal service to Gloria, and Andy's extensive knowledge of the chocolate industry, Gloria and Cameron have agreed to allow him to participate in the business venture. In addition to contributing the assets described below, Andy has agreed to oversee the integration of the accounting and information systems factories in partial consideration of his stock in YCl. The parties agree that the value of these services is $133,000.- The following are the relevant facts regarding YCI: YCI is formed on October 1, 2020. It will have an October 1 to September 30fiscal year. 0 $30,000 of organizational costs are incurred by YCI before September 30, 2021. OYCI will be taxed as a C corporation.' O Additional information regarding YCI:- Employer Identification Number: 48-151764524 o Address: 111 Milky Way, Jackson, Wyoming 830014 O Assignment #24 Your CPA firm, Rams LLC, will be preparing the 2020 tax return for YCI (includes operating activity from October 1, 2020 through September 30, 2021). As senior tax associates with your firm, you are charged with the preparation of the tax return. Exhibit 1 is a spreadsheet that sets forth the trial balance for YCl as of September 30, 2021, prepared by its in-house accountant. The trial balance accounts are prepared under U.S. GAAP. This trial balance is also included on Blackboard in the "YCI Case" Excel file. Using the trial balance and the information below, prepare YCl's tax return for the year ended September 30, 2021. You are only required to complete Pages 1 through 6 of the Form 1120, and you do not need to complete Schedule L or Schedule M-2. You can find the form here the IRS's website - Form 1120. You will also likely need to reference the instructions to form 1120, which can be found here - Form 1120 Instructions. To complete the tax return, you should do the following steps: 1. Make necessary adjustments to the GAAP trial balance to arrive the tax trial balance. The "YCI Case" Excel file provides guidance on the adjustments that you need tomake. 2. Determine the YTD tax profit using the tax trial balance 3. Adjust YTD profit for the book-tax differencelisted in the Excel file to arrive at taxable income 2. Determine the YTD tax profit using the tax trial balance- 3. Adjust YTD profit for the book-tax differencelisted in the Excel file to arrive at taxable income per the tax return 4. Use the information in the Excel file to complete Form 1120, pages 1-6, and the supplemental schedule (available in the YCI Case Excel Document on Blackboard). You do not have to complete Schedule L or Schedule M-2. You are not permitted to use tax return software to complete the return. Here are some additional facts that you should take into account when preparing YCl's tax return for its first fiscal year. Andy rendered all of the professional services that he agreed to perform in exchange for his stock during YCI's first fiscal year. After reviewing the accounts receivable aging report and historical information regarding collections, YCl's management has concluded that the allowance for doubtfulaccounts Page 2 of 5 as of 9/30/2021 should be $225,000. The actual amount of bad debts incurred and written off during YCl's first fiscal year was $85,000 (so total bad debt expense equals $310,000). O Gloria had a tax basis of $400,000 in the marketable securities she contributed to YCl. The fair market value of the marketable securities was $200,000 on the date of YCI's formation. Gloria acquired the marketable securities, stock in ChocoCoco, Inc., on September 1, 2011. Due to product liability claims made against ChocoCoco, Inc., it filed for Chapter 7 bankruptcy and its shares of stock became completely worthless on July 1, 2021. For financial reporting purposes, a loss of $200,000 is reflected on YCI's books. O Gloria and Cameron decided shortly after the formation of YCI that it would be more cost effective to lease office space rather than to own real estate. Therefore, the office building contributed by Gloria to YCI was sold on May 1, 2021, for $1,030,000 (net of selling expenses) resulting in a gain, for book purposes, of $80,000. Depreciation, for book purposes, accrued on the office building, through the date of the sale, was $25,000, as reflected on the trial balance. Gloria acquired the building on January 1, 2012. The following is information relating to the sale of the office building: Sale proceeds, less selling expenses, of $1,030,000.- Depreciation expense on the building, for financial reporting purposes, from 10/1/2020 through 4/30/2021 was $25,000.- For tax purposes, depreciation on the building from 10/1/2020 through 4/30/2021 was $35,000.- Hint: To compute the gain for tax purposes, use YCl's tax basis in the land and building that you computed in Part 1 of the case. You will need to compute YCl's "adjusted basis" (basis less accumulated tax depreciation at the time of the sale) in the land and building before you can compute the gain. 0 o Given the competitive nature of the chocolate industry, the economic life of the customer lists and contracts ranges from five to eight years. For financial accounting purposes, YCI's management has decided to amortize the customer lists and contracts over a seven-year period on a straight-line basis. Accordingly, the amortization expense, for financial accounting purposes, of the customer lists and contracts for the fiscal year ended 9/30/2021 is $101,429. For tax purposes, the customer lists and contracts are amortizable over a period of 15 years. Therefore, the amortization expense associated with the customer lists and contracts, for tax purposes, for the fiscal year ended 9/30/2021 is $9,754 (because YCl's tax basis in the customer lists and contracts is $146,315). The billing and accounting software has an estimated useful life of four to six years. On October 1, 2020, YCI paid $40,000 for the rights to the use of a patch to the software program to account for a required change in format for billing. For financial accounting purposes, YCI has decided to amortize the billing and accounting software over a five-year period resulting in amortization expense of $8,000 for the fiscal year ended 9/30/2021. For tax purposes, assume that the amortization expense of the software program for tax purposes for the fiscal year ended 9/30/2021 is $13,333. The following are the asset/depreciation schedules for the vehicles and equipment as of 9/30/2021: Vehicles 10/1/2020 Beginning Balance Purchased during fiscal year 9/30/2021 fiscal year depreciation 9/30/2021 Ending Balance U.S. GAAP Tax Cost A/D2 Cost A/D2 $315,000 $550,000 $195,000 $175,000 $98,000 $178,250 $490,000 $98,000 $725,000 $373,250 $175,000 K Equipment 10/1/2020 Beginning Balance Purchased during fiscal year 9/30/2021 fiscal year depreciation 9/30/2021 Ending Balance U.S. GAAP Coste A/D2 Cost A/De $965,000 $1,260,000 $250,000 $1,260,000+ $1,260,000 $230,000 $250,000 $2,225,000 $230,000 $2,520,000 $500,000 o Organizational expenses incurred by YCl for its organization and formation was $30,000, all of which were incurred prior to September 30, 2021.4 O Management of YC has instructed you to maximize all deductions, including that available for organizational expenses for the fiscal year ended 9/30/2021. However, YCI has elected to forgo any IRC $ 179 deduction or bonus depreciation for which it may qualify. O Salaries were paid to officers as follows: Gloria Delgado, SSN: 866-65-4321, $300,000.- Cameron Tucker, SSN: 555-66-7777, $225,000.- O O o OYCI made the following estimated payments of taxes: 1st quarter, January 15, 2021, $156,000. 2nd quarter, March 15, 2021, $156,000.- 3rd quarter, June 15, 2021, $156,000.- 4th quarter, September 15, 2021, $156,000.- O Exhibit 1 Yellowstone Chocolate, Inc. Trial Balance (income statement accounts) as of 9/30/2021 Yellowstone Chocolate, Inc. Sales Revenues Sales Returns and Allowances Software Licensing Fees Revenue - Software Support and Services Interest Income, Taxable Interest Income, Tax-exempt Dividend Income (20%