Corporate Tax Return Problem 1 Required: Complete Alvin's Music Inc.'s (AMI) 2017 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below. Neither Form 4562 for depreciation nor Form 4797 for the sale of the cquipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120. If any information is missing, use reasonable assumptions to fill in the gaps The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms Facts: Alvin's Music Inc. (AMI) formed in 2008 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their was store on June 12, 2009. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDS. Alvin owns 60 percent of the outstanding common stock of AMI and Thcona owns the remaining 40 percent C AMI is located at 355 Music Way, East Palo Alto, California 94303 AMI's Employer Identification Number is 29-5748859 AMI's business activity is retail sales of music-related products. Its business activity code is 451140. Officers of the corporation are as follows: Alvin is the chief executive officer and president (Social Security number 123-45-6789) Theona is the executive vice president (Social Security number 978-65-4321) over operations (Social Security number 789-12-3456) Gwen Givens is the vice president Carlson Bannister is the secretary (Social Sccurity number 321-54-6789). All officers devote 100 percent of their time to the business and all officers are U.S. citizens Neither Gwen nor Carlson owns any stock in AMI. AMI uses the accrual method of accounting and has a calendar year-end AMI made four equal estimated tax payments of S70,000 cach. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, AMI would like to receive a refund AMI paid a dividend of S80,000 to its sharcholders on Dccember 1. AMI had sufficent earnings and profits (E&P) to absorb the distribution. Page C-14 The following is AMI's audited income statement for 2017: AMI Income Statement For year ending December 31, 2017 Revenue from sales $ 3,420,000 Sales returns and allowances (40,000) Revenuc from sales $ 3,420,000 (40,000) Sales returns and allowances Cost of goods sold _(834,000) $ 2,546,000 Gross profit from operations Other income: Capital gains 8,000 2,000 Gain from disposition of fixed assets Dividend income 12,000 Interest income 15,000 $2,583,000 Gross income Expenses: Compensation S(1,300,000) Depreciation (20,000) Bad debt expense (15,000) Mcals (5,000) Maintenance (5,000) (27,000) Charitable donations Property taxes (45,000) State income taxes (60,000) Other taxes (56,000) Interest (62,000) Advertising (44,000) Professional services (32,000) Pension expense (40,000) Supplies (6,000) Other expenses (38,000) Total expenses (1.755,000) Income before taxes 828,000 Federal income (260,000) tax expense $ 568,000 Net income after taxes Income before taxes 828,000 Federal income tax expense (260,000) S 568,000 Net income after taxes Notes: 1. AMI has a capital loss carryover o this vear from last year in the amount of $5,000. 2. AMI's inventory-related purchases during the year were S1,134,000. AMI values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of $263A do not apply to AMI. 3. Of the $15,000 interest income, $2,500 was from a City of Fremont bond issued in 2016, $3,500 was from a Pleas anton city bond issucd in 2017, $3,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account. 4. AMI sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cumulative total of S4,000 of book depreciation on the asset and a cumulative total of $6,000 of tax depreciation For tax purposes, the entire gain was recaptured as ordinary income under 1245. Page C-15 5. AMI's dividend income came from Simon's Sheet Music. AMI owned 15,000 shares of the stock in Simon's Sheet Music (SSM) at the beginning of the year. This represented 15 percent of the SSM outstanding stock 6. On July 22, 2017, AMI sold 2,500 shares of its Simon's Sheet Music stock for $33,000. It had originally purchased these shares on April 24, 2013, for $25,000. After the sale, AMI owned 12.5 percent of Simon's Sheet Music. 7. AMI's compensation is as follows: Alvin, $210,000 Theona, $190,000 Gwen, $110,000 Carlson, $90,000 Other, $700,000 8. AMI wrote off $10,000 in accounts receivable as uncollectible during the year 9. Tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A. 10. Of the $62,000 of interest expense, $56,000 was from the mortgage on AMI's building and the remaining $6,000 of interest was from business-related loans. 11. The pension expense is the same for both book and tax purposes 12. Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona. The following arc AMI's audited balance shccts as of January 1, 2017, and December 31, 2017. 2017 January 1 December 31 Assets S 240,000 171,000 Cash Accounts receivable 600,000 700,000 was $31,000. None of the depreciation should be claimed on Form 1125A 9. Tax depreciation 10. Of the $62,000 of interest expense, S56,000 was from the mortgage on AMI's building and the remaining $6,000 of interest was from business-related loans. 11. The pension expense is the same for both book and tax purposes 12. Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona The following are AMI's audited balance sheets as of January 1, 2017, and December 31, 2017. 2017 January 1 December 31 Assets S 240,000 Cash 171,000 Accounts receivable 600,000 700,000 Allowance for doubtful accounts (35,000) (40,000) 1,700,000 Inventory 1,400,000 U.S. government bonds 50,000 50,000 State and local bonds 140,000 140,000 Investments in stock 300,000 275,000 Building and other depreciable assets 1,500,000 1,600,000 Accumulated depreciation (200,000) (216,000) Land 900,000 900,000 Other assets 270.000 250,000 Total assets $5,550,000 $5,145,000 Liabilities and Shareholders' Equity S 250,000 Accounts payable 220,000 120,000 Other current liabilities 125,000 790,000 Mortgage 800,000 Other liabilities 200,000 162,000 Capital stock 600,000 600,000 Retained carnings 3.170.000 3,658.000 Total liabilities and sharcholders' equity $5,550,000 $5,145,000 Corporate Tax Return Problem 1 Required: Complete Alvin's Music Inc.'s (AMI) 2017 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below. Neither Form 4562 for depreciation nor Form 4797 for the sale of the cquipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120. If any information is missing, use reasonable assumptions to fill in the gaps The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms Facts: Alvin's Music Inc. (AMI) formed in 2008 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their was store on June 12, 2009. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDS. Alvin owns 60 percent of the outstanding common stock of AMI and Thcona owns the remaining 40 percent C AMI is located at 355 Music Way, East Palo Alto, California 94303 AMI's Employer Identification Number is 29-5748859 AMI's business activity is retail sales of music-related products. Its business activity code is 451140. Officers of the corporation are as follows: Alvin is the chief executive officer and president (Social Security number 123-45-6789) Theona is the executive vice president (Social Security number 978-65-4321) over operations (Social Security number 789-12-3456) Gwen Givens is the vice president Carlson Bannister is the secretary (Social Sccurity number 321-54-6789). All officers devote 100 percent of their time to the business and all officers are U.S. citizens Neither Gwen nor Carlson owns any stock in AMI. AMI uses the accrual method of accounting and has a calendar year-end AMI made four equal estimated tax payments of S70,000 cach. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, AMI would like to receive a refund AMI paid a dividend of S80,000 to its sharcholders on Dccember 1. AMI had sufficent earnings and profits (E&P) to absorb the distribution. Page C-14 The following is AMI's audited income statement for 2017: AMI Income Statement For year ending December 31, 2017 Revenue from sales $ 3,420,000 Sales returns and allowances (40,000) Revenuc from sales $ 3,420,000 (40,000) Sales returns and allowances Cost of goods sold _(834,000) $ 2,546,000 Gross profit from operations Other income: Capital gains 8,000 2,000 Gain from disposition of fixed assets Dividend income 12,000 Interest income 15,000 $2,583,000 Gross income Expenses: Compensation S(1,300,000) Depreciation (20,000) Bad debt expense (15,000) Mcals (5,000) Maintenance (5,000) (27,000) Charitable donations Property taxes (45,000) State income taxes (60,000) Other taxes (56,000) Interest (62,000) Advertising (44,000) Professional services (32,000) Pension expense (40,000) Supplies (6,000) Other expenses (38,000) Total expenses (1.755,000) Income before taxes 828,000 Federal income (260,000) tax expense $ 568,000 Net income after taxes Income before taxes 828,000 Federal income tax expense (260,000) S 568,000 Net income after taxes Notes: 1. AMI has a capital loss carryover o this vear from last year in the amount of $5,000. 2. AMI's inventory-related purchases during the year were S1,134,000. AMI values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of $263A do not apply to AMI. 3. Of the $15,000 interest income, $2,500 was from a City of Fremont bond issued in 2016, $3,500 was from a Pleas anton city bond issucd in 2017, $3,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account. 4. AMI sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cumulative total of S4,000 of book depreciation on the asset and a cumulative total of $6,000 of tax depreciation For tax purposes, the entire gain was recaptured as ordinary income under 1245. Page C-15 5. AMI's dividend income came from Simon's Sheet Music. AMI owned 15,000 shares of the stock in Simon's Sheet Music (SSM) at the beginning of the year. This represented 15 percent of the SSM outstanding stock 6. On July 22, 2017, AMI sold 2,500 shares of its Simon's Sheet Music stock for $33,000. It had originally purchased these shares on April 24, 2013, for $25,000. After the sale, AMI owned 12.5 percent of Simon's Sheet Music. 7. AMI's compensation is as follows: Alvin, $210,000 Theona, $190,000 Gwen, $110,000 Carlson, $90,000 Other, $700,000 8. AMI wrote off $10,000 in accounts receivable as uncollectible during the year 9. Tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A. 10. Of the $62,000 of interest expense, $56,000 was from the mortgage on AMI's building and the remaining $6,000 of interest was from business-related loans. 11. The pension expense is the same for both book and tax purposes 12. Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona. The following arc AMI's audited balance shccts as of January 1, 2017, and December 31, 2017. 2017 January 1 December 31 Assets S 240,000 171,000 Cash Accounts receivable 600,000 700,000 was $31,000. None of the depreciation should be claimed on Form 1125A 9. Tax depreciation 10. Of the $62,000 of interest expense, S56,000 was from the mortgage on AMI's building and the remaining $6,000 of interest was from business-related loans. 11. The pension expense is the same for both book and tax purposes 12. Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona The following are AMI's audited balance sheets as of January 1, 2017, and December 31, 2017. 2017 January 1 December 31 Assets S 240,000 Cash 171,000 Accounts receivable 600,000 700,000 Allowance for doubtful accounts (35,000) (40,000) 1,700,000 Inventory 1,400,000 U.S. government bonds 50,000 50,000 State and local bonds 140,000 140,000 Investments in stock 300,000 275,000 Building and other depreciable assets 1,500,000 1,600,000 Accumulated depreciation (200,000) (216,000) Land 900,000 900,000 Other assets 270.000 250,000 Total assets $5,550,000 $5,145,000 Liabilities and Shareholders' Equity S 250,000 Accounts payable 220,000 120,000 Other current liabilities 125,000 790,000 Mortgage 800,000 Other liabilities 200,000 162,000 Capital stock 600,000 600,000 Retained carnings 3.170.000 3,658.000 Total liabilities and sharcholders' equity $5,550,000 $5,145,000