Complete Blue Catering Service Inc.s (BCS) 2011 Form 1120, Schedule D,

and Schedule G (if applicable) using the information provided below.

Form 4562 for depreciation is not required. Include the amount of tax depreciation

given in the problem on the appropriate line on the first page of Form 1120.

Assume that BCS does not owe any alternative minimum tax.

If any information is missing, use reasonable assumptions to fill in the gaps.

The forms, schedules, and instructions can be found at the IRS Web site

(www.irs.gov). The instructions can be helpful in completing the forms.

Facts:

Cara Siler, Janna Funk, and Valerie Cloward each own one-third of the common stock

of Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2008.

It has only one class of stock outstanding and operates as a C corporation for tax

purposes. BCS caters all types of social events throughout southern California.

BCS is located at 540 Waverly Way, San Diego, CA 92101.

BCSs Employer Identification Number is 38-4743474.

Appendix C C-17

BCSs business activity is catering food and services. Its business activity code

is 722300.

The shareholders also work as officers for the corporation as follows:

Cara is the chief executive officer and president (Social Security number

231-54-8976).

Janna is the executive vice president and chief operating officer (Social

Security number 798-56-3241).

Valerie is the vice president of finance (Social Security number

879-21-4536).

All officers devote 100 percent of their time to the business and all officers

are U.S. citizens.

BCS uses the accrual method of accounting and has a calendar year-end.

BCS made four equal estimated tax payments of $20,000 each. Its tax liability

last year was $70,000. If it has overpaid its federal tax liability, BCS would

like to receive a refund.

BCS paid a dividend of $30,000 to its shareholders on November 1. BCS had

ample earnings and profits (E&P) to absorb the distribution.

The following is BCSs audited income statement for 2011:

BCS

Income Statement

For year ending December 31, 2011

Revenue from sales $1,800,000

Sales returns and allowances (5,000)

Cost of goods sold (350,000)

Gross profit from operations $1,445,000

Other income:

Capital loss (15,000)

Dividend income 25,000

Interest income 10,000

Gross income $1,465,000

Expenses:

Compensation (950,000)

Depreciation (10,000)

Bad debt expense (15,000)

Meals and entertainment (3,000)

Maintenance (6,000)

Property taxes (11,000)

State income taxes (45,000)

Other taxes (44,000)

Rent (60,000)

Interest (5,000)

Advertising (52,000)

Professional services (16,000)

Employee benefits (32,000)

Supplies (5,000)

Other expenses (27,000)

Total expenses (1,281,000)

Income before taxes 184,000

Federal income tax expense (62,000)

Net income after taxes $ 122,000

C-18 Appendix C

Notes:

1. BCSs inventory-related purchases during 2011 were $360,000. It values its inventory

based on cost using the FIFO inventory cost flow method. Assume the

rules of 263A do not apply to BCS.

2. Of the $10,000 interest income, $1,250 was from a City of Irvine bond that was

used to fund public activities (issued in 2005), $1,750 was from an Oceanside city

bond used to fund private activities (issued in 2004), $1,000 was from a U.S.

Treasury bond, and the remaining $6,000 was from a money market account.

3. BCSs dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000

shares of the stock in Clever Cakes at the beginning of the year. This represented

10 percent of SSM outstanding stock.

4. On October 1, 2011, BCS sold 1,000 shares of its CC stock for $25,000. It had

originally purchased these shares on April 18, 2008, for $40,000. After the sale,

BCS owned 9 percent of CC.

5. BCSs compensation is as follows:

Cara $150,000

Janna $140,000

Valerie $130,000

Other $530,000

6. BCS wrote off $25,000 in accounts receivable as uncollectible during the year.

7. BCSs regular tax depreciation was $28,000. None of the depreciation should

be claimed on Form 1125A.

8. The $5,000 interest expense was from a business loan.

9. Other expenses include $6,000 for premiums paid on term life insurance policies

for which BCS is the beneficiary. The policies cover the lives of Cara, Janna,

and Valerie.

The following are BCSs audited balance sheets as of January 1, 2011, and December 31,

2011.

2011

January 1 December 31

Assets

Cash $ 180,000 $ 205,000

Accounts receivable 560,000 580,000

Allowance for doubtful accounts (60,000) (50,000)

Inventory 140,000 150,000

U.S. government bonds 20,000 20,000

State and local bonds 120,000 120,000

Investments in stock 400,000 360,000

Fixed assets 140,000 160,000

Accumulated depreciation (50,000) (60,000)

Other assets 20,000 21,000

Total assets $1,470,000 $1,506,000

Liabilities and Shareholders Equity

Accounts payable 280,000 240,000

Other current liabilities 20,000 18,000

Other liabilities 40,000 26,000

Capital stock 400,000 400,000

Retained earnings 730,000 822,000

Total liabilities and shareholders equity $1,470,000 $1,506,000