Chapter 15 TRP 15-2

Harrell and Smith, Inc., 204 Ambulance Street, Anywhere, CA 92345, is a corporation (EIN 57-1234567) formed on January 1, 2010. Information concerning the corporation and its two shareholders follows. It uses tax/cash basis accounting, did not pay dividends in excess of earnings and profits, has no foreign shareholders, is not publicly traded, and has no NOL carrybacks.

Bruce Harrell (SSN 412-34-5670), 1018 Lexington Downs, Anywhere, CA 92345, is a 60% shareholder. Della Smith (SSN 412-34-5671), 4564 Yates Road, Anywhere, CA 92345, is a 40% shareholder. Bruce received a dividend of $60,000, and Della received a dividend of $40,000. Both of these dividends are in addition to their salaries.

HARRELL AND SMITH, INC. Comparative Balance Sheet As of December 31, 2014, and December 31, 2015
	12/31/14	12/31/15
Assets
Cash	$ 39,955	$ 45,459
Investments	258,456	169,125
Office equipment	225,000	310,759
Accumulated depreciation (equipment)	(156,000)	(165,379)
Building	491,200	491,200
Accumulated depreciation (building)	(37,232)	(49,826)
Total assets	$821,379	$801,338
Liabilities and equity
Notes payable	$353,600	$335,458
Common stock	10,000	10,000
Retained earnings	457,779	455,880
Total liabilities and equity	$821,379	$801,338

HARRELL AND SMITH, INC. Income Statement For the Year Ending December 31, 2015
Revenue
Consulting income	$866,689
Interest income	4,231
Rental income	9,000
Dividend income from less-than-20%-owned domestic corporation(qualified)	8,234
Long-term capital losses	(8,200)
Total revenue	$879,954
Expenses
Salaries and wages (nonowners)	$253,000
Officers salaries
Harrell	225,000
Smith	150,000
Depreciation	21,973
Interest expense	20,127
Taxes and licenses	24,051
Utilities	15,500
Travel	11,850
Meals and entertainment (100%)	12,452
Auto	18,500
Insurance (health)	7,000
Accounting and legal	6,450
Repairs	3,200
Charitable contributions	12,000
Payroll penalties	750
Total expenses	$781,853
Net income	$ 98,101

Prepare Form 1120, pages 1 5, for Harrell and Smith, Inc. Schedule D and Form 4562 can be omitted (the information given is not sufficient to complete these forms).

I am having problems figuring out the answer to line 26 on the 1120 IRS form.

Thank you

Rikki