CORPORATE TAX RETURN PROBLEM 2 Required: Complete Blue Catering Service Inc.s (BCS) 2013 Form 1120, Schedule D, and Schedule G (i? applicable) using the in?ormation provided below. Form 4562 ?or depreciation is not required. Include the amount o? tax deprecia- tion given in the problem on the appropriate line on the frst page o? Form 1120. Assume that BCS does not owe any alternative minimum tax. I? any in?ormation is missing, use reasonable assumptions to fll in the gaps. The ?orms, schedules, and instructions can be ?ound at the IRS website (www.irs.gov). The instructions can be help?ul in completing the ?orms. Facts: Cara Siler, Janna Funk, and Valerie Cloward each own one-third o? the common stock o? Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2008. It has only one class o? stock outstanding and operates as a C corporation ?or tax purposes. BCS caters all types o? social events throughout southern Cali?ornia. BCS is located at 540 Waverly Way, San Diego, CA 92101. BCSs Employer Identifcation Number is 38-4743474. BCSs business activity is catering ?ood and services. Its business activity code is 722300. The shareholders also work as o?fcers ?or the corporation as ?ollows: Cara is the chie? executive o?fcer and president (Social Security number 231-54-8976). Janna is the executive vice president and chie? operating o?fcer (Social Security number 798-56-3241). Valerie is the vice president o? fnance (Social Security number 879-21-4536). All o?fcers devote 100 percent o? their time to the business and all o?fcers are U.S. citizens. BCS uses the accrual method o? accounting and has a calendar year-end. BCS made ?our equal estimated tax payments o? $20,000 each. Its tax liability last year was $70,000. I? it has overpaid its ?ederal tax liability, BCS would like to receive a re?und. BCS paid a dividend o? $30,000 to its shareholders on November 1. BCS had ample earnings and profts (E&P) to absorb the distribution. The ?ollowing is BCSs audited income statement ?or 2013: BCS Income Statement For year ending December 31, 2013 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

BCS Income Statement For year ending December 31, 2013 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

Notes: 1. BCSs inventory-related purchases during 2013 were $360,000. It values its in- ventory based on cost using the FIFO inventory cost ?low method. Assume the rules o? 263A do not apply to BCS. 2. O? the $10,000 interest income, $1,250 was ?rom a City o? Irvine bond that was used to ?und public activities (issued in 2011), $1,750 was ?rom an Oceanside city bond used to ?und private activities (issued in 2004), $1,000 was ?rom a U.S. Treasury bond, and the remaining $6,000 was ?rom a money market account. 3. BCSs dividend income came ?rom Clever Cakes Inc. (CC). BCS owned 10,000 shares o? the stock in Clever Cakes at the beginning o? the year. This represented 10 percent o? SSM outstanding stock. 4. On October 1, 2013, BCS sold 1,000 shares o? its CC stock ?or $25,000. It had originally purchased these shares on April 18, 2008, ?or $40,000. A?ter the sale, BCS owned 9 percent o? CC. 5. BCSs compensation is as ?ollows: Cara $150,000 Janna $140,000 Valerie $130,000 Other $530,000 6. BCS wrote o?? $25,000 in accounts receivable as uncollectible during the year. 7. BCSs regular tax depreciation was $28,000. None o? the depreciation should be claimed on Form 1125A. 8. The $5,000 interest expense was ?rom a business loan. 9. Other expenses include $6,000 ?or premiums paid on term li?e insurance policies ?or which BCS is the bene?iciary. The policies cover the lives o? Cara, Janna, and Valerie.

The ?ollowing are BCSs audited balance sheets as o? January 1, 2013, and December 31, 2013. 2013 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