CORPORATE TAX RETURN PROBLEM 2

Required:

Complete Blue Catering Service Inc.s (BCS) 2018 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.

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:

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, 2010. 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, California 92101.

BCSs Employer Identification Number is 38-4743474.

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 $10,000 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 2018:

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

Note

1. BCSs inventory-related purchases during 2018 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 issued in 2015, $1,750 was from an Oceanside city bond issued in 2014, $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, 2018, BCS sold 1,000 shares of its CC stock for $25,000. It had originally purchased these shares on April 18, 2013, 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 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, 2018, and December 31, 2018.

Assets January 1 December 31

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