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Bottle-Up, Inc., was organized on January 8, 2005, and made its S election on January 24, 2005. The necessary consents to the election were filed

Bottle-Up, Inc., was organized on January 8, 2005, and made its S election on January 24, 2005. The necessary consents to the election were filed in a timely manner. Its address is 1234 Hill Street, City, ST 33333. Bottle-Up uses the calendar year as its tax year, the accrual method of accounting, and the first-in, first-out (FIFO) inventory method. Bottle-Up manufactures ornamental glass bottles. It made no changes to its inventory costing methods this year. It uses the specific identification method for bad debts for book and tax purposes. Herman Hiebert and Melvin Jones own 500 shares each. Both individuals materially participate in Bottle-Ups single activity. Herman Hiebert is the tax matters person. Financial statements for Bottle-Up for the current year are shown in Tables C:11-2 through C:11-4. Assume that Bottle-Ups business qualifies as a U.S. production activity and that its qualified production activities income is $90,000. The S corporation uses the small business simplified overall method for reporting these activities (see discussion for Line 12d of Schedules K and K-1 in the Form 1120S instructions). Prepare a 2014 S corporation tax return for Bottle-Up, showing yourself as the paid preparer.

C:11-64 Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

Drs. Bailey and Firth formed the corporation on January 1, 2013, and the corporation immediately elected S corporation status effective at the beginning of 2013.

Upon formation of the corporation, Dr. Bailey received common stock worth $1.2 million, and Dr. Firth received common stock worth $2.8 million.

The balance sheet information is the same as in Table C:9-3 except the equity section is as follows:

January 1, 2014 December 31, 2014
Common stock $4,000,000 $4,000,000
Retained earnings 171,360 91,020

The $180,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Baileys salary.

Qualified production activities income (QPAI) still equals $2.24 million, but employers W-2 wages allocable to U.S. production activities equal $1.16 million (because of Dr. Baileys salary). The company, being an eligible small pass-through S corporation, uses the small business simplification overall method for reporting these activities (see discussion for Line 12d of Schedule K and Line 12 of Schedule K-1 in the Form 1120S instructions).

Use book numbers for Schedule L and Schedule M-1 in Form 1120S.

TABLE C:11-2 Bottle-Up, Inc. Income Statement for the Year Ended December 31 of the Current Year (Problem C:11-63)

Sales $2,500,000
Returns and allowances (15,000)
Net sales $2,485,000
Beginning inventory $ 102,000
Purchases 900,000
Labor 200,000
Supplies 80,000
Utilities 100,000
Other manufacturing costs 188,000 a
Goods available for sale $1,570,000
Ending inventory (96,000) 1,474,000 b
Gross profit $1,011,000
Salariesc $ 451,020
Utilities expense 54,000
Depreciation (MACRS depreciation is $36,311) 11,782
Automobile and truck expense 26,000
Office supplies expense 9,602
Advertising expense 105,000
Bad debts expense 620
Rent expense 30,000
Interest expensed 1,500
Meals and entertainment expense 21,000
Selling expenses 100,000
Repairs and maintenance expense 38,000
Accounting and legal expense 4,500
Charitable contributionse 9,000
Insurance expensef 24,500
Hourly employees fringe benefits 11,000
Payroll taxes 36,980
Other taxes 2,500
Penalties (fines for overweight trucks) 1,000 (938,004)
Operating profit $ 72,996
Other income and losses:

Long-term gain on sale of capital assets

$ 48,666g

Sec. 1231 loss

(1,100)h

Interest on U.S. Treasury bills

1,200

Interest on State of Florida bonds

600

Dividends from domestic corporations

11,600

Investment expenses

(600) 60,366
Net income $ 133,362

a Total MACRS depreciation is $74,311. Assume that $38,000 of depreciation has been allocated to cost of sales for both book and tax purposes so that the book and tax inventory and cost of sales amounts are the same. The AMT depreciation adjustment on personal property is $9,000.

b The cost of goods sold amount reflects the Uniform Capitalization Rules of Sec. 263A. The appropriate restatements have been made in prior years.

c Officer salaries of $120,000 are included in the total. All are employers W-2 wages.

d Investment interest expense is $500. All other interest expense is trade- or business-related. None of the interest expense relates to the production of tax-exempt income.

e The corporation made all contributions in cash to qualifying charities.

f Includes $3,000 of premiums paid for policies on lives of corporate officers. Bottle-Up is the beneficiary for both policies.

g The corporation acquired the capital assets on March 3, 2012 for $100,000 and sold them on September 15, 2014, for $148,666.

h The corporation acquired the Sec. 1231 property on June 5, 2013 for $10,000 and sold it on December 21, 2014, for $8,900.

TABLE C:11-3 Bottle-Up, Inc. Balance Sheet for January 1 and December 31 of the Current Year (Problem C:11-63)

January 1 December 31
Assets:

Cash

$ 15,000 $116,948

Accounts receivable

41,500 45,180

Inventories

102,000 96,000

Stocks

103,000 74,000

Treasury bills

15,000 16,000

State of Florida bonds

10,000 10,000

Building and equipment

374,600 375,000

Minus:Accumulated depreciation

(160,484) (173,100)

Land

160,000 190,000

Total

$660,616 $750,028
Liabilities and equities:

Accounts payable

$ 36,000 $ 10,000

Accrued salaries payable

12,000 6,000

Payroll taxes payable

3,416 7,106

Sales taxes payable

5,200 6,560

Due to Mr. Hiebert

10,000 5,000

Mortgage and notes payable (current maturities)

44,000 52,000

Long-term debt

210,000 260,000

Capital stock

10,000 10,000

Retained earnings

330,000 393,362

Total

$660,616 $750,028

TABLE C:11-4 Bottle-Up, Inc. Statement of Change in Retained Earnings, for the Current Year Ended December 31 (Problem C:11-63)

Balance, January 1 $330,000a
Plus: Net income $133,362
Minus: Dividends (70,000) 63,362
Balance, December 31 $393,362

a The January 1 accumulated adjustments account balance is $274,300.

Required: Prepare the 2014 S corporation tax return (Form 1120S), including the following additional schedules and forms: Schedule D, Form 4562, and Schedule K-1.

Optional: (1) Complete Schedule M-2 in Form 1120S even though the company has never been a C corporation. For this purpose, the accumulated adjustments account at the beginning of 2014 is $171,360. (2) Prepare a schedule for each shareholders basis in his or her S corporation stock. For this purpose, Baileys stock basis at the beginning of 2014 is $1,251,408 and Firths is $2,535,952.

1120S Department of the Treasury Internal Revenue Service U.S. Income Tax Return for an S Corporation Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. OMB No. 1545-0123 2014 For calendar year 2014 or tax year beginning , 2014, ending , 20 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 D Employer identification number A S election effective date B Business activity code number (see instructions) C Check if Sch. M-3 attached E Date incorporated F Total assets (see instructions) $ G Is the corporation electing to be an S corporation beginning with this tax year? Yes No If Yes, attach Form 2553 if not already filed H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation I Enter the number of shareholders who were shareholders during any part of the tax year ......... Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. Income 1 a 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 Net gain (loss) from Form 4797, line 17 (attach Form 4797) ............ 4 5 Other income (loss) (see instructionsattach statement) ............. 5 6 Total income (loss). Add lines 3 through 5 ................ 6 Deductions (see instructions for limitations) 7 Compensation of officers (see instructionsattach Form 1125-E) .......... 7 8 Salaries and wages (less employment credits) ................ 8 9 Repairs and maintenance ....................... 9 10 Bad debts ........................... 10 11 Rents ............................. 11 12 Taxes and licenses ......................... 12 13 Interest ............................ 13 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562) .... 14 15 Depletion (Do not deduct oil and gas depletion.) ............... 15 16 Advertising ........................... 16 17 Pension, profit-sharing, etc., plans .................... 17 18 Employee benefit programs ...................... 18 19 Other deductions (attach statement) ................... 19 20 Total deductions. Add lines 7 through 19 ................ 20 21 Ordinary business income (loss). Subtract line 20 from line 6 ........... 21 Tax and Payments 22 a Excess net passive income or LIFO recapture tax (see instructions) .. 22a b Tax from Schedule D (Form 1120S) ........... 22b c Add lines 22a and 22b (see instructions for additional taxes) ............ 22c 23 a 2014 estimated tax payments and 2013 overpayment credited to 2014 23a b Tax deposited with Form 7004 ............ 23b c Credit for federal tax paid on fuels (attach Form 4136) ..... 23c d Add lines 23a through 23c ...................... 23d 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached ...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed .. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid .. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 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 Preparer's signature Date Check if self-employed PTIN Firms name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) Form 1120S (2014) Page 2 Schedule B Other Information (see instructions) 1 Check accounting method: a Cash b Accrual Yes No c Other (specify) 2 See the instructions and enter the: a Business activity b Product or service 3 At any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If "Yes," attach Schedule B-1, Information on Certain Shareholders of an S Corporation . . 4 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 stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If Yes, complete (i) through (v) below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Name of Corporation (ii) Employer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage of Stock Owned (v) If Percentage in (iv) is 100%, Enter the Date (if any) a Qualified Subchapter S Subsidiary Election Was Made b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital 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 (v) below . . . . . . . (i) Name of Entity (ii) Employer Identification Number (if any) (iii) Type of Entity (iv) Country of Organization (v) Maximum Percentage Owned in Profit, Loss, or Capital 5 a At the end of the tax year, did the corporation have any outstanding shares of restricted stock? . . . . . . . . If Yes, complete lines (i) and (ii) below. (i) Total shares of restricted stock . . . . . . . . . (ii) Total shares of non-restricted stock . . . . . . . . b At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments? . If Yes, complete lines (i) and (ii) below. (i) Total shares of stock outstanding at the end of the tax year (ii) Total shares of stock outstanding if all instruments were executed 6 Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? . . . . . . . . . . . . . . . . . . . . . . . . 7 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. 8 If the corporation: (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset (or the basis of any other property) in the hands of a C corporation and (b) has net unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years (see instructions) . . . . . . . . . . . . . . . $ 9 Enter the accumulated earnings and profits of the corporation at the end of the tax year. $ 10 Does the corporation satisfy both of the following conditions? a The corporations total receipts (see instructions) for the tax year were less than $250,000 . . . . . . . . . . b The corporations total assets at the end of the tax year were less than $250,000 . . . . . . . . . . . . If Yes, the corporation is not required to complete Schedules L and M-1. 11 During the tax year, did the corporation have any non-shareholder debt that was canceled, was forgiven, or had the terms modified so as to reduce the principal amount of the debt? . . . . . . . . . . . . . . . . . If Yes, enter the amount of principal reduction $ 12 During the tax year, was a qualified subchapter S subsidiary election terminated or revoked? If Yes, see instructions . 13 a Did the corporation make any payments in 2014 that would require it to file Form(s) 1099? . . . . . . . . . . b If Yes, did the corporation file or will it file required Forms 1099? . . . . . . . . . . . . . . . . . Form 1120S (2014) Form 1120S (2014) Page 3 Schedule K Shareholders Pro Rata Share Items Total amount Income (Loss) 1 Ordinary business income (loss) (page 1, line 21) . . . . . . . . . . . . . . 1 2 Net rental real estate income (loss) (attach Form 8825) . . . . . . . . . . . . 2 3a Other gross rental income (loss) . . . . . . . . . . 3a b Expenses from other rental activities (attach statement) . . 3b c Other net rental income (loss). Subtract line 3b from line 3a . . . . . . . . . . 3c 4 Interest income . . . . . . . . . . . . . . . . . . . . . . . . 4 5 Dividends: a Ordinary dividends . . . . . . . . . . . . . . . . . . . 5a b Qualified dividends . . . . . . . . . . 5b 6 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120S)) . . . . . . . . 7 8 a Net long-term capital gain (loss) (attach Schedule D (Form 1120S)) . . . . . . . . 8a b Collectibles (28%) gain (loss) . . . . . . . . . . . 8b c Unrecaptured section 1250 gain (attach statement) . . . . 8c 9 Net section 1231 gain (loss) (attach Form 4797) . . . . . . . . . . . . . . 9 10 Other income (loss) (see instructions) . . Type 10 Deductions 11 Section 179 deduction (attach Form 4562) . . . . . . . . . . . . . . . . 11 12 a Charitable contributions . . . . . . . . . . . . . . . . . . . . . 12a b Investment interest expense . . . . . . . . . . . . . . . . . . . . 12b c Section 59(e)(2) expenditures (1) Type (2) Amount 12c(2) d Other deductions (see instructions) . . . Type 12d Credits 13a Low-income housing credit (section 42(j)(5)) . . . . . . . . . . . . . . . 13a b Low-income housing credit (other) . . . . . . . . . . . . . . . . . . 13b c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) . . 13c d Other rental real estate credits (see instructions) Type 13d e Other rental credits (see instructions) . . . Type 13e f Biofuel producer credit (attach Form 6478) . . . . . . . . . . . . . . . 13f g Other credits (see instructions) . . . . . Type 13g Foreign Transactions 14a Name of country or U.S. possession b Gross income from all sources . . . . . . . . . . . . . . . . . . . 14b c Gross income sourced at shareholder level . . . . . . . . . . . . . . . 14c Foreign gross income sourced at corporate level d Passive category . . . . . . . . . . . . . . . . . . . . . . . 14d e General category . . . . . . . . . . . . . . . . . . . . . . . 14e f Other (attach statement) . . . . . . . . . . . . . . . . . . . . . 14f Deductions allocated and apportioned at shareholder level g Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 14g h Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 14h Deductions allocated and apportioned at corporate level to foreign source income i Passive category . . . . . . . . . . . . . . . . . . . . . . . 14i j General category . . . . . . . . . . . . . . . . . . . . . . . 14j k Other (attach statement) . . . . . . . . . . . . . . . . . . . . . 14k Other information l Total foreign taxes (check one): Paid Accrued . . . . . . . . . . 14l m Reduction in taxes available for credit (attach statement) . . . . . . . . . . . 14m n Other foreign tax information (attach statement) Alternative Minimum Tax (AMT) Items 15 a Post-1986 depreciation adjustment . . . . . . . . . . . . . . . . . . 15a b Adjusted gain or loss . . . . . . . . . . . . . . . . . . . . . . 15b c Depletion (other than oil and gas) . . . . . . . . . . . . . . . . . . 15c d Oil, gas, and geothermal propertiesgross income . . . . . . . . . . . . . 15d e Oil, gas, and geothermal propertiesdeductions . . . . . . . . . . . . . . 15e f Other AMT items (attach statement) . . . . . . . . . . . . . . . . . . 15f Items Affecting Shareholder Basis 16 a Tax-exempt interest income . . . . . . . . . . . . . . . . . . . . 16a b Other tax-exempt income . . . . . . . . . . . . . . . . . . . . . 16b c Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . 16c d Distributions (attach statement if required) (see instructions) . . . . . . . . . . 16d e Repayment of loans from shareholders . . . . . . . . . . . . . . . . . 16e Form 1120S (2014) Form 1120S (2014) Page 4 Schedule K Shareholders Pro Rata Share Items (continued) Total amount Other Information 17a Investment income . . . . . . . . . . . . . . . . . . . . . . . 17a b Investment expenses . . . . . . . . . . . . . . . . . . . . . . 17b c Dividend distributions paid from accumulated earnings and profits . . . . . . . . 17c d Other items and amounts (attach statement) Reconciliation 18 Income/loss reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14l 18 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 . . . . . . . . . . . 23 Additional paid-in capital . . . . . . . 24 Retained earnings . . . . . . . . . 25 Adjustments to shareholders equity (attach statement) 26 Less cost of treasury stock . . . . . . 27 Total liabilities and shareholders equity . . Form 1120S (2014) Form 1120S (2014) Page 5 Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. The corporation may be required to file Schedule M-3 (see instructions) 1 Net income (loss) per books . . . . . . 2 Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize) 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14l (itemize): a Depreciation $ b Travel and entertainment $ 4 Add lines 1 through 3 . . . . . . . . 5 Income recorded on books this year not included on Schedule K, lines 1 through 10 (itemize): a Tax-exempt interest $ 6 Deductions included on Schedule K, lines 1 through 12 and 14l, not charged against book income this year (itemize): a Depreciation $ 7 Add lines 5 and 6 . . . . . 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 Schedule M-2 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable Income Previously Taxed (see instructions) ( ) ( ) ( ) (a) Accumulated adjustments account (b) Other adjustments account (c) Shareholders undistributed taxable income previously taxed 1 Balance at beginning of tax year . . . . . 2 Ordinary income from page 1, line 21 . . . 3 Other additions . . . . . . . . . . 4 Loss from page 1, line 21 . . . . . . . 5 Other reductions . . . . . . . . . . 6 Combine lines 1 through 5 . . . . . . . 7 Distributions other than dividend distributions 8 Balance at end of tax year. Subtract line 7 from line 6 Form 1120S (2014)

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