Equipment Corporation incorporated was established on October 20, 1974. to comply with accounting requirements, the company uses an accrual method of accounting. Its accumulated earnings and profits as of December 31, 2016, were $1,200. It made cash distributions during its 2016 calendar tax year of $140,089. This consisted of $85,089 to preferred shareholders and $55,000 to common shareholders. The entire distribution to preferred shareholders is a taxable dividend. The $27,500 distribution on March 15, 2016, to common shareholders is a taxable dividend to extent of $27,318 (99.33%), and the $27,500 distribution on September 15, 2016, to common shareholders is a taxable dividend to the extent of $26,118 (94.97%).

The following profit and loss account appeared in the books of the Equipment Corporation for calendar year 2016. It is required to file Form 1120 and completes Form 1120-F (M-1 and M-2).

Account		Debit	Credit
Gross sales			$1,840,000
Sales returns and allowances		$20,000
Cost of goods sold		1,520,000
Interest income from:
Banks	$10,000
Tax-exempt state bonds	5,000		15,000
Proceeds from life insurance (death of corporate officer)			6,000
Bad debt recoveries (no tax deduction claimed)			3,500
Insurance premiums on lives of corporate officers (corporation is beneficiary of policies)		9,500
Compensation of officers		40,000
Salaries and wages		28,000
Repairs		800
Taxes		10,000
Contributions:
Deductible	$23,000
Other	500	23,500
Interest paid (loan to purchase tax-exempt bonds)		850
Depreciation		5,200
Loss on securities		3,600
Net income per books after federal income tax		140,825
Federal income tax accrued for 2016		62,225
Total		$1,864,500	$1,864,500

The corporation analyzed the retained earnings and the following items appeared in this account on its books.
Item	Debit		Credit
Balance, January 1			$225,000
Net profit (before federal income tax)			203,050
Reserve for contingencies	$10,000
Income tax accrued for the year	62,225
Dividends paid during the year	140,089
Refund of 1995 income tax			18,000
Balance, December 31	233,736
Total	$446,050		$446,050
The following items appear on page 1 of Form 1120.
Gross sales ($1,840,000 less returns and allowances of $20,000)			$1,820,000
Cost of goods sold			1,520,000
Gross profit from sales			$300,000
Interest income			10,000
Total income			$310,000
Deductions:
Compensation of officers		$40,000
Salaries and wages		28,000
Repairs		800
Taxes		10,000
Contributions (maximum allowable)		22,500
Depreciation		6,200
Total deductions			107,500
Taxable income			$202,500

1. Please prepare Schedule M-1 for the Equipment Corporation using the financial information and the Form 1120 line items provided above.

2. Please prepare Schedule M-2 for the Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.