Gigi Gianella and Roxie LeClaire formed Pretty Pups, Inc. (PPI) in 2014.  PPI sells (retail) all essential puppy products including food, toys, treats, beds, and walking gear. Gigi owns 60 percent of the outstanding common stock of PPI and Roxie owns the remaining 40 percent.

• PPI is located at 411 Dreamy Road, Mount Airy, NC 27830.
• PPI's Employer Identification Number is 59-4125561.
• PPI's business activity is retail sales of pet supplies. Its business activity code is 453910.
• Officers of the corporation are as follows:
  • Gigi is the president (Social Security number 404-52-6682). 
  • Roxie is the executive vice president (Social Security number 542-88-8972). 
• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
• PPI uses the accrual method of accounting and has a calendar year-end.
• PPI made four equal estimated tax payments of $8,750 each. Its tax liability last year was $41,000. If it has overpaid its federal tax liability, PPI would like to receive a refund.
• PPI paid a dividend of $30,000 to its shareholders on December 1. PPI had sufficient earnings and profits (E&P) to absorb the distribution. 

Notes: 

1.  PPI's inventory-related purchases during 2022 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 PPI.

2.  Of the $10,000 interest income, $3,000 was from a City of Asheville bond issued in 2016, and the remaining $7,000 was from a money market account.

3. PPI's dividend income came from Sinclair, Inc. PPI owned 10,000 shares of the stock in Sinclair at the beginning of the year. This represented 5% percent of Sinclair's outstanding stock.

4.  On November 1, 2022, PPI sold 1,000 shares of its Sinclair stock for $25,000. It had originally purchased these shares on May 19, 2014, for $40,000. After the sale, PPI owned 3% of Sinclair.

5. PPI's compensation is as follows:

 

Officer Compensation:

• Gigi,                            $250,000
• Roxie,                         $175,000

 

Employee Compensation:   $525,000

 

6.  PPI wrote off $25,000 in accounts receivable as uncollectible during the year.

7.  Use the following information to calculate PPI's tax depreciation expense for 2022.

a. PPI owned the following fixed assets at the beginning and end of 2022:

• Building acquired for $79,170 and placed in service on January 1, 2014.  (39-year nonresidential property)
• Equipment acquired for $47,800 and placed in service on January 19, 2019.  (7-year property

b. On October 17, 2022, the corporation acquired and placed in service a piece of equipment costing $20,000.  The equipment is seven-year MACRS property for tax depreciation. The corporation is electing to expense the entire cost of the equipment under Section 179 but elected out of bonus depreciation. 

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 PPI is the beneficiary. The policies cover the lives Gigi and Roxie. 

10.  Meals related to the meals expense shown on PPI's Income Statement were not provided by a restaurant and, therefore, do quality for the 100% deduction for tax purposes. 

 

Pretty Pups, Inc. Balance Sheets
	January 1, 2022	December 31, 2022
Assets:
Cash	$200,000	$225,000
Accounts receivable	560,000	580,000
Allowance for doubtful accounts	(60,000)	(50,000)
Inventory	140,000	150,000
State and local bonds	120,000	120,000
Investments in stock	400,000	360,000
Land	13,030	13,030
Fixed assets	126,970	146,970
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 - common	400,000	400,000
Retained earnings - unappropriated	730,000	822,000
Total Liabilities and Shareholders' Equity	$1,470,000	$1,506,000