Corporate Tax Return Problem (Form 1120)

2-48 During 2014, Lisa Cutter and Jeff McMullen decided they would like to start their own gourmet hamburger business. Lisa and Jeff believed that the public would love the recipes used by Lisas mom, Tina Wood brook. They also thought that they had the necessary experience to enter this business, as Jeff currently owned a fast-food franchise business while Lisa had experience operating a small bakery. After doing their own market research, they established Slatterys Inc., which was incorporated on February 1, 2015. The companys address is 5432 Partridge Pl., Tulsa, Oklahoma 74105 and its employer identification number is 88-7654321.

The company started modestly. After refurbishing an old gas station that it had purchased, the company opened for business on February 25, 2015. Shortly after business began, however, business boomed. By the close of 2015, the company had established two other locations. Slatterys has three shareholders who own stock as follows:

Shareholder Shares

Lisa Cutter 500

Jeff McMullen 200

Tina Wood brook (Lisas mother) 300

Total outstanding 1,000

Slatterys was formed on February 1, 2015. On that date, shareholders made contributions as follows:

Lisa Cutter contributed $30,000 in cash and 200 shares of MND stock, a publicly held company, which had a fair market value of $20,000. Lisa had purchased the MND stock on October 3, 2010 for $8,000.

Jeff McMullen contributed equipment worth $20,000 which he had used in his own business until he contributed it. The equipments basis was $48,000 (original cost in February 2013, $100,000; depreciation using MACRS accelerated percentages for five-year property, $52,000).

Tina Wood brook contributed $30,000 in cash.

The company is on the accrual basis and has chosen to use the calendar year for tax purposes. The corporations adjusted trial balance for financial accounting purposes reveals the following information:

Debit Credit

Cash $229,200

Ending inventory 0

Equipment 35,000

Land 10,000

Building 15,000

Improvements to building 55,000

Accumulated depreciation 9,000

Notes payable 93,000

Accounts payable 45,000

Taxes payable 8,000

Salaries payable 20,000

Capital stock 100,000

Sales 600,000

Gains on sale of MND stock 18,000

Dividend on MND corporation 2,000

Legal expenses 5,500

Accounting expenses 3000

Miscellaneous expenses 2,100

Premium on key employee insurance policy 800

Advertising 8,600

Purchases 300,000

State income taxes 8,000

Federal income taxes 48,000

Payroll taxes 12,500

Salary expenses 120,000

Insurance 9,000

Repairs 6,500

Charitable contribution 17,600

Depreciation per book 9,000

Interest expense 200

The company has provided additional information below:

The company took a physical count of inventory on December 31, 2015. On that date, it was determined that ending inventory was $16,000. This ending inventory must be recorded on the companys books and will result in a reduction in cost of goods sold.

On February 9, 2015, the corporation purchased an old gas station for $25,000 to house the restaurant. Of the $25,000 purchase price, $10,000 was allocated to the land while $15,000 was allocated to the building. Prior to opening, the old gas station was renovated. Improvements to the structure were made during February at a cost of $55,000. Assume the building and improvements are 39-year property.

The MND stock was sold for $38,000 on April 3, 2015. Shortly before the sale, MND had declared and paid a dividend. Slatterys received $2,000 on April 1, 2015. MND was incorporated in Delaware.

The corporation purchased refrigeration equipment (7-year property) on February 15, 2015 for $15,000(ignore bonus depreciation)

Slatterys has elected not to use the limited expensing provisions of code Sec.179. In addition, it claimed the maximum depreciation with respect to all other assets. Any other election required to minimize the corporation tax liability were made.

Lisa Cutter (Social Security no. 444-33-2222) is president of the corporation and spends 90 percent of her working time in the business. Salary expense includes her salary of $60,000 and an accrued bonus to her as of December 31 of $15,000. No other officers received compensation. The key employee life insurance policy covers Lisas life and the corporation is the beneficiary.

The company paid estimated income taxes during the year of $48,000 ($12,000 on each installment due date). For simplicitys sake, in completing the tax return do not adjust the books to reflect the actual tax due.

Net income per books $85200

Total assets $351200

Required: Prepare Form 1120 and other appropriate forms, schedules, and elections for Slatterys. On separate schedule(s), show all calculations used to determine all reported amounts except those for which the source is obvious or which are shown on a formal schedule to be filed with the return.