C: 3-66 TAX FORM/RETURN PREPARATION PROBLEMS

Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, and State 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-2016014. The company incorporated on December 31, 2010, and began business on January 2, 2011. Table C:3-4 contains balance sheet information at January 1, 2014, and December 31, 2014.Table C:3-5 presents an income statement for 2014. These schedules are presented on a book basis. Other information follows the tables.

Estimated Tax Payments (Form 2220):

The corporation deposited estimated tax payments as follows:

April 15, 2014 $105,000

June 15, 2014 210,000

September 15, 2014 252,000

December 15, 2014 252,000

Total $819,000

Although June 15 falls on a weekend, a deposit made on the next business day is considered made on the due date, June 15. Taxable income in 2013 was $1.5 million, and the 2013.tax was $510,000. The corporation earned its 2014 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods.

lnventory and Cost of Goods Sold (Form 1125-A):

The corporation uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected on Form 1125-A. No other costs or expenses are allocated to cost of goods sold. Note: the corporation is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous three years was less than $10 million.

Line 9 (a) Check (ii)

(b), (c) & (d) Not applicable

(e) & (f) No

Compensation of Officers (Form 1125-E):

(a) (b) (c) (d) (e)

Mary Travis XXX-XX-XXXX 100% 50% $255,000

John Willis XXX-XX-XXXX 100% 25% 160,000

Chris Parker XXX-XX-XXXX 100% 25% 160,000

Total $585,000

Bad Debts:

For tax purposes, the corporation uses the direct write-off method of deducting bad debts. For book purposes, the corporation uses an allowance for doubtful accounts. During 2014, the corporation charged $36,000 to the allowance account, such amount representing actual write-offs for 2014.

Additional lnformation (Schedule K):

1 b Accrual 8 Do not check box

2 a 451140 9 Fill in the correct amount

b Retail sales 10 3

c Musical instruments 11 Do not check box

3 No 12 Not applicable

4 a No 13-14 No

b Yes; omit schedule G

5 a No 15 a No

b No b Not applicable

6-7 No 16-18 No

Organizational Expenditures:

The corporation incurred $11,000 of organizational expenditures on January 2, 2010.

For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2011 and amortize the remaining $6,000 amount over 180 months, with a full month's amortization taken for January 2011. The corporation reports this amortization in Part IV of Form 4562 and includes it in "Other Deductions" on Form 1120, Line 26.

Capital Gains and Losses:

The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2014, for $150,000. The corporation acquired the stock on December 16, 2013, for $100,000. The corporation also sold 75 shares of JSB Corp. common stock on June 17, 2014, for $120,000. The corporation acquired this stock on September 18, 2012, for $135,000. The corporation has a $20,000 capital loss carryover from 2013. 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,15 years (old) and ten years (new); and Trucks, 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 C:3-4 and C:3-5 reflect these calculations.

For tax purposes: All assets are MACRS property as follows: Store building, 39-year non-residential property; equipment, seven-year property; and trucks, five-year property. The corporation acquired the store building for $1.5 million and placed it in service on January 2, 2011. The corporation acquired two pieces of equipment for $4000, 000 (Equipment 1) and $800,000 (Equipment 2) and placed them in service on July 18, 2012. The trucks are not listed property and are not subject to the limitation on luxury automobiles. The corporation did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2014 Accumulated tax depreciation through December 31, 2013, on these properties is as follows:

Store building $113,835

Equipment 1 225,080

Equipment 2 450,160

Trucks 104,000

On October 16, 2014, the corporation sold for $425,000 Equipment 1 that originally cost 400,000 on January 2, 2011. The corporation had no Sec. 1231 losses from prior years.

In a separate transaction on October 17, 2014, the corporation acquired and placed in service a piece of equipment costing $1.6 million. Assume these two transactions do not qualify as a like-kind exchange. The new equipment is seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment but elected out of bonus depreciation. Where applicable, use IRS depreciation tables to compute 2014 depreciation.

Other lnformation:

The corporation's activities do not qualify for the U.S. production activities deduction.

Ignore the AMT and accumulated earnings tax.

The corporation received dividends (see Income Statement in Table C:3-5) from taxable, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20%.

The corporation paid $90,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.

The state income tax in Table C:3-5 is the exact amount of such taxes incurred during the year.

The corporation is not entitled any credits.

Ignore the financial statement impact of any tax return underpayment penalties incurred on the tax return.

Required: Prepare the 2014 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 Schedule M-1even though the IRS does not require both Schedule M-1 and Schedule M-3.

	Table C:3-4
	Melodic Music Sales, Inc. - Book Balance Sheet Information
					January 1, 2014			December 31, 2104
	Accounts				Debit	Credit		Debit	Credit
	Cash				$ 242,794			$ 433,399
	Accounts receivable				360,000			450,000
	Allowance for doubtful accounts					$ 18,000			$ 22,500
	Inventory				2,250,000			3,150,000
	Investment in corporate stock				285,000			50,000
	Investment in municiple bonds				32,000			32,000
	Net current deferred tax asset				12,920			7,650
	Cash surrender value of insurance policy				50,000			70,000
	Land				250,000			250,000
	Buildings				1,500,000			1,500,000
	Accumulated depreciation- Buildings					75,000			105,000
	Equipment				1,200,000			2,400,000
	Accumulated depreciation- Equipment					200,000			266,667
	Trucks				200,000			200,000
	Accumulated depreciation- Trucks					60,000			100,000
	Accounts payable					320,000			288,000
	Notes payable (short-term)					600,000			480,000
	Accrued payroll taxes					13,500			16,875
	Accrued state income taxes					8,100			13,500
	Accrued federal income taxes					-			110,866
	Bonds payable (long-term)					2,200,000			2,200,000
	Net noncurrent deferred tax liability					188,114			308,713
	Capital stock-Common					900,000			900,000
	Retained earnings - Unappropriated					1,800,000			3,730,928
	Totals				$6,382,714	$6,382,714		$8,543,049	$8,543,049

Table C:3-5
Melodic Music Sales, Inc. - Book Income Statement 2014
Sales							$ 9,000,000
Returns							(225,000)
Net sales							8,775,000
Beginning inventory					$2,250,000
Purchases					4,950,000
Ending inventory					(3,150,000)
Cost of goods sold							(4,050,000)
Gross profit							$ 4,725,000
Expenses:
Amortization					$ -
Depreciation					216,667
Repairs					18,720
General insurance					49,500
Net permium-Officers' life insurance					40,500
Officers' compensation					585,000
Other salaries					360,000
Utilities					64,800
Advertising					43,200
Legal and accounting fees					45,000
Charitable contributions					27,000
Payroll taxes					56,250
Interest expense					189,000
Bad debt expense					40,500
Total expenses							(1,736,137)
Gain on stock sale							105,000
Interest on municiple bonds							4,500
Net gain on stock sales							35,000
Dividend income							10,800
Net income before income taxes							$ 3,144,163
Federal income tax expense							(1,055,735)
State income tax expense							(67,500)
Net income before income taxes							$ 2,020,928