C:3-66 Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 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.

TABLE C:3-4 Melodic Musical Sales, Inc.Book Balance Sheet Information

Account Details

January 1,2014

December 31,2014

Account	Debit	Credit	Debit	Credit
Cash	242,794		433,399
AR	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 municipal 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 - Equiptment		200,000
Trucks	200,000		200,000
Accumulated depreciation - Trucks		60,000		100,000
AP		320,000		288,000
Notes payable (Short term)		600,000		480,000
Accrued payroll taxes		13,500		16,875
Accrued state income tax		8,100		13,500
Accrued federal income tax		0		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

Inventory 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)	(f)
Mary Travis	XXX-XX-XXXX	100%	50%	265,000
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 writeoff 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 writeoffs for 2014.

Additional Information (Schedule K):

1 b	Accrual
2 a	451140
b	Retail sales
c	Musical instruments
3	No
4 a	No
b	Yes: omit Schedule G
5 a	No
b	No
6-7	No
8	Do not check box
9	Fill int he correct amount
10	3
11	Do not check box
12	Not applicable
13-14	No
15a	No
b	Not applicable
16-18	No

Organizational Expenditures: TABLE C:3-5 Melodic Musical Sales, Inc.Book Income Statement 2014

Sales		9,000,000
Returns		(225,000)
Net Sales		8,775,000
Beginnign inventory	2,250,000
Purchases	4,950,000
Ending inventory	(3,150,000)
Cost of good sold		(4,050,000)
Gross profit		4,725,000
Expenses:
Amortization	0
Depreciation	216,667
Repairs	18,720
General insurance	49,500
net premium - officers life insurance	40,500
officers compensation	585,000
other salaries	360,000
utilities	64,800
advertising	43,200
legal and accoutning fees	45,000
charitable contributions	27,000
payroll taxes	56,250
interest expense	189,000
bed debt expenses	40,500
Total expenses		(1,736,137)
gain on sales of equiptment		105,000
interest on municipal 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 expenses		(1,055,735)
state income tax expenses		(67,500)
net income		2,020,928

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 months amortization taken for January 2011. The corporation reports this amortization in Part VI 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-years 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 nonresidential real 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 $400,000 (Equipment 1) and $800,000 (Equipment 2) and placed them in service on January 2, 2011. The corporation acquired the trucks for $200,000 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
equiptment 1	225,080
equiptment 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 published IRS depreciation tables to compute 2014 depreciation (reproduced in Appendix C of this text).

Other Information:

1. The corporations activities do not qualify for the U.S. production activities deduction.

2. Ignore the AMT and accumulated earnings tax.

3. 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%.

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

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

6. The corporation is not entitled any credits.

7. Ignore the financial statement impact of any 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-1 even though the IRS does not require both Schedule M-1 and Schedule M-3.

Forms to fill out are located at: https://www.irs.gov/pub/irs-prior/f1120--2014.pdf