C:3-66 TAX FORM/RETURN PREPARATION PROBLEMS Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. The cor- poration 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-2017015. The company incorporated on December 31, 2011, and began busi- ness on January 2, 2012. Table C:3-4 contains balance sheet information at January 1, 2015, and December 31, 2015. Table C:3-5 presents an income statement for 2015. 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, 2015 $ 90,000 June 15, 2015 180,000 September 15, 2015 220,000 December 15, 2015 220,000 Total $710,000 Taxable income in 2014 was $1.2 million, and the 2014 tax was $408,000. The corpora- tion earned its 2015 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods. 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) Compensation of Officers (Form 1125-E): (c) (d) Mary Travis XXX-XX-XXXX 100% 50% $230,000 John Willis XXX-XX-XXXX 100% 25% 145,000 Chris Parker XXX-XX-XXXX 100% 25% 145,000 Total $520,000 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 2015, the corporation charged $32,000 to the allowance account, such amount representing actual writeoffs for 2015. TABLE C:3-5 Melodic Musical Sales, Inc.-Book Income Statement 2015 $ 8,000,000 (200,000) $ 7,800,000 $2,000,000 4,400,000 (2,800,000) (3,600,000) $ 4,200,000 Sales Returns Net sales Beginning inventory Purchases Ending inventory Cost of goods sold Gross profit Expenses: Depreciation Repairs General insurance Net premium-Officers' life insurance Officers' compensation Other salaries Utilities Advertising Legal and accounting fees Charitable contributions Payroll taxes Interest expense Bad debt expense Total expenses Gain on sale of equipment Interest on municipal bonds Net gain on stock sales Dividend income Net income before income taxes Federal income tax expense State income tax expense Net income $ 130,000 16,640 44,000 24,000 520,000 320,000 57,600 38,400 40,000 24,000 50,000 168,000 36,000 (1,468,640) 80,000 4,000 17,000 9,600 $ 2,841,960 (950,382) (60,000) $ 1,831,578 Do not check box Fill in the correct amount b 10 Additional Information (Schedule K): 1 b Accrual 2 a 451140 Retail sales Musical instruments No No Yes; omit Schedule G 5a No b No 6-7 No 12 Do not check box Not applicable 13-14 No 15a b No Not applicable No 16-18 Organizational Expenditures: The corporation incurred $3,000 of organizational expenditures on January 2, 2012. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct the entire $3,000 in 2012. Therefore, no amortization expenditures appear in the tax return or book financial statements for the current year. Capital Gaints and Losses: The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2015, for $75,000. The corporation acquired the stock on December 15, 2014, for $50,000. The corporation also sold 75 shares of SB Corp. common stock on June 17, 2015, for S60,000. The corporation acquired this stock on September 18, 2013, for $68,000. The corporation has a $10,000 capital loss carryover from 2014. 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, ten years, and tracks, 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 noe residential real property, equipment, even-year property and trucks, five-year property. The corporation acquired the store building for $1 million and placed it in service on January 2, 2012. The corporation acquired two pieces of equipment for $200,000 (Equipment 1) and $400,000 (Equipment 2) and placed them in service on January 2, 2012. The corporation acquired the trucks for $100,000 and placed them in service on July 18, 2013. The tracks are not listed property and are not subject to the limitation on luxury automobiles. The corpora tion did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2015, Accumulated tax depreciation through Desember 31, 2014 on these properties is as follows: Store building $ 75,890 Equipment 1 112540 Equipment 2 225,080 Trucks 52,000 On October 16, 2015, the corporation sold for $220,000 Equipment 1 that originally cost 200,000 on January 2, 2012. The corporation had no Sec. 1231 losses from prior years In a separate transaction on October 17, 2015, the corporation acquired and placed in ser vice a piece of equipment costing $800,000. 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 clected out of bo- nus depreciation. Where applicable, use published IRS depreciation tables to compute 2015 depreciation (reproduced in Appendix of this text). Other Information 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 a able, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns les than 20% The corporation paid $80,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings The state income tax in Table C3-5 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 underpayment penalties incurred on the tax return. Required: Prepare the 2015 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules. Optional: Prepare both Schedule M-3 (but omit Schedule Band Form 8916-A) and Sched ule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3. Note to Instructor: See solution in the Instructor's Resource Manual for other optional information to provide to students. TABLE C:3-4 Melodic Musical Sales, Inc.-Book Balance Sheet Information Account January 1, 2015 Debit Credit December 31, 2015 Debit Credit $ 214,833 320,000 $ 477,193 400,000 $ 16,000 $ 20,000 2,000,000 168,000 32,000 50,000 250,000 1,000,000 2,800,000 50,000 32,000 65,000 250,000 1,000,000 50,000 70,000 600,000 1,200,000 150,000 180,000 Cash Accounts receivable Allowance for doubtful accounts Inventory Investment in corporate stock Investment in municipal bonds Cash surrender value of insurance policy Land Buildings Accumulated depreciationBuildings Equipment Accumulated depreciation Equipment Trucks Accumulated depreciation-Trucks Accounts payable Notes payable (short-term) Accrued payroll taxes Accrued state income taxes Accrued federal income taxes Bonds payable (long-term) Net deferred tax liability Capital stock-Common Retain earningsUnappropriated Totals 100,000 100,000 30,000 300,000 500,000 12,000 3,600 2,000 1,200,000 71,233 800,000 1,600,000 $4,734,833 50,000 270,000 400,000 15,000 6,000 94,532 900,000 217,083 800,000 3,351,578 $6,374,193 $4,734,833 $6,374,193 C:3-66 TAX FORM/RETURN PREPARATION PROBLEMS Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. The cor- poration 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-2017015. The company incorporated on December 31, 2011, and began busi- ness on January 2, 2012. Table C:3-4 contains balance sheet information at January 1, 2015, and December 31, 2015. Table C:3-5 presents an income statement for 2015. 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, 2015 $ 90,000 June 15, 2015 180,000 September 15, 2015 220,000 December 15, 2015 220,000 Total $710,000 Taxable income in 2014 was $1.2 million, and the 2014 tax was $408,000. The corpora- tion earned its 2015 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods. 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) Compensation of Officers (Form 1125-E): (c) (d) Mary Travis XXX-XX-XXXX 100% 50% $230,000 John Willis XXX-XX-XXXX 100% 25% 145,000 Chris Parker XXX-XX-XXXX 100% 25% 145,000 Total $520,000 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 2015, the corporation charged $32,000 to the allowance account, such amount representing actual writeoffs for 2015. TABLE C:3-5 Melodic Musical Sales, Inc.-Book Income Statement 2015 $ 8,000,000 (200,000) $ 7,800,000 $2,000,000 4,400,000 (2,800,000) (3,600,000) $ 4,200,000 Sales Returns Net sales Beginning inventory Purchases Ending inventory Cost of goods sold Gross profit Expenses: Depreciation Repairs General insurance Net premium-Officers' life insurance Officers' compensation Other salaries Utilities Advertising Legal and accounting fees Charitable contributions Payroll taxes Interest expense Bad debt expense Total expenses Gain on sale of equipment Interest on municipal bonds Net gain on stock sales Dividend income Net income before income taxes Federal income tax expense State income tax expense Net income $ 130,000 16,640 44,000 24,000 520,000 320,000 57,600 38,400 40,000 24,000 50,000 168,000 36,000 (1,468,640) 80,000 4,000 17,000 9,600 $ 2,841,960 (950,382) (60,000) $ 1,831,578 Do not check box Fill in the correct amount b 10 Additional Information (Schedule K): 1 b Accrual 2 a 451140 Retail sales Musical instruments No No Yes; omit Schedule G 5a No b No 6-7 No 12 Do not check box Not applicable 13-14 No 15a b No Not applicable No 16-18 Organizational Expenditures: The corporation incurred $3,000 of organizational expenditures on January 2, 2012. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct the entire $3,000 in 2012. Therefore, no amortization expenditures appear in the tax return or book financial statements for the current year. Capital Gaints and Losses: The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2015, for $75,000. The corporation acquired the stock on December 15, 2014, for $50,000. The corporation also sold 75 shares of SB Corp. common stock on June 17, 2015, for S60,000. The corporation acquired this stock on September 18, 2013, for $68,000. The corporation has a $10,000 capital loss carryover from 2014. 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, ten years, and tracks, 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 noe residential real property, equipment, even-year property and trucks, five-year property. The corporation acquired the store building for $1 million and placed it in service on January 2, 2012. The corporation acquired two pieces of equipment for $200,000 (Equipment 1) and $400,000 (Equipment 2) and placed them in service on January 2, 2012. The corporation acquired the trucks for $100,000 and placed them in service on July 18, 2013. The tracks are not listed property and are not subject to the limitation on luxury automobiles. The corpora tion did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2015, Accumulated tax depreciation through Desember 31, 2014 on these properties is as follows: Store building $ 75,890 Equipment 1 112540 Equipment 2 225,080 Trucks 52,000 On October 16, 2015, the corporation sold for $220,000 Equipment 1 that originally cost 200,000 on January 2, 2012. The corporation had no Sec. 1231 losses from prior years In a separate transaction on October 17, 2015, the corporation acquired and placed in ser vice a piece of equipment costing $800,000. 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 clected out of bo- nus depreciation. Where applicable, use published IRS depreciation tables to compute 2015 depreciation (reproduced in Appendix of this text). Other Information 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 a able, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns les than 20% The corporation paid $80,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings The state income tax in Table C3-5 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 underpayment penalties incurred on the tax return. Required: Prepare the 2015 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules. Optional: Prepare both Schedule M-3 (but omit Schedule Band Form 8916-A) and Sched ule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3. Note to Instructor: See solution in the Instructor's Resource Manual for other optional information to provide to students. TABLE C:3-4 Melodic Musical Sales, Inc.-Book Balance Sheet Information Account January 1, 2015 Debit Credit December 31, 2015 Debit Credit $ 214,833 320,000 $ 477,193 400,000 $ 16,000 $ 20,000 2,000,000 168,000 32,000 50,000 250,000 1,000,000 2,800,000 50,000 32,000 65,000 250,000 1,000,000 50,000 70,000 600,000 1,200,000 150,000 180,000 Cash Accounts receivable Allowance for doubtful accounts Inventory Investment in corporate stock Investment in municipal bonds Cash surrender value of insurance policy Land Buildings Accumulated depreciationBuildings Equipment Accumulated depreciation Equipment Trucks Accumulated depreciation-Trucks Accounts payable Notes payable (short-term) Accrued payroll taxes Accrued state income taxes Accrued federal income taxes Bonds payable (long-term) Net deferred tax liability Capital stock-Common Retain earningsUnappropriated Totals 100,000 100,000 30,000 300,000 500,000 12,000 3,600 2,000 1,200,000 71,233 800,000 1,600,000 $4,734,833 50,000 270,000 400,000 15,000 6,000 94,532 900,000 217,083 800,000 3,351,578 $6,374,193 $4,734,833 $6,374,193