Hi, I believe someone asked you a question about a tax return problem 1-33. It deals with a bike shop.
1-54 Chapter 1 I ncome Toxotio n l-29 of Corp orotio ns Corporate Estimated Tax. F Corporation, a calendar year corporation, reported the following information with respect to its tax liabilities for 2013 and2014: Actual 201 4 tax liability (regular tax) $1 . Actual 2014 alternative minimum tax Actual 2013 tax liabili$ (regular tax) 20,000 15,000 100,000 . F made timely quarterly estimated tax payments of $26,000 each quarter during 2014. F Corporation is not a "large" corporation (i.e., it did not have taxable income of $1 million or more in any of the three preceding taxable years). The 2013 tax liability was for a full l2-month period. Compute the amount of quarterly underpayment for F Corporation, if any. l-30 Corporate Estimated Iax. Refer to Problem 1-29. Assume that F Corporation is a "large" corporation. Compute the amount of quarterly underpayment for F Corporation, if any. 1.-31 Transaction Between Corporation and Its Shareholder In 2013, G, a shareholder in ABC Corporation, sold to her 90Vo controlled corporation 20 shares of IBM stock for $2,000. The stock was acquired in 2011 for $4,000. In2014, ABC sold the stock to an unrelated party for $5,000. a. What amount of gain or loss will G report on her 2013 tax return? b. What amount of gain or loss will ABC report on its 2014 tax return'? l-32 Transaction Between Corporation and lts Shareholder H owns a residential rental property (an apartment unit) that he purchased in 1986 for $100,000 ($80,000 allocated to the building and $20,000 to the land). Now that the building is fully depreciated and is no longer generating tax benefits, H has decided to sell the building and land to XYZ, H's solely owned C corporation, for $200,000 ($160,000 allocated to the building and $40,000 to the land). XYZ will continue to operate the property as an apartment unit. H is in the 34Eo marginal income tax bracket; XYZ is in the 34Vo marginal tax bracket. a. What is H's motive behind this sale? b. How does the tax law treat the sale from HtoXYZ? 1-33 Sam Smith (446-46-4646) and Jane Jones (312-12-1212) own and operate The Bike Shop, Inc. The corporation was formed on May 1, 1996. Sam is the president and owns 707o of the stock while Jane is the secretary-treasurer and owns the remaining 30 percent. Both are full-time employees. Sam received a salary of $150,000 and Jane received a salary of $60,000. Other pertinent information is given below: . The corporation is an accrual-method, calendar-year taxpayer. . Inventories are determined using the lower of cost or market method. . The corporate headquarters are located at 1234 Wheeling Road, Cincinnati, OH 45202. . The employer identification number is 15-4416243. A tentative income statement and balance sheet for the corporation are given below. _ksfl*:gH* ***k*1*qJ: Cash $ ... 1 1o,ooo $ 691,000 Accounts receivable. 14,000 31,000 Allowance for doubtful accounts (2,000) (6,000) 20,000 20,000 U.S. Treasury bonds. . . 50,000 70,000 lnventory. 375,000 375,000 Equipment. 295,000 405,000 Land... 164,000 164,000 Building. 500,000 500,000 (211,000) (251,000) Stocks . . Accumulated depreciation $1 ,315,000 $1,999,000 Problem Materiols Liabilities and Equity Accounts payable lanuary 1,2013 December 31,2013 55,000 1 year)......... 350,000 500,000 , Notespayable(duewithin 400,000 Capital stock (all common) 150,000 150,000 Retained earnings (unappropriated) 600,000 1,099,000 $1l1ip00 !122!00 Debit Credit Sales . . $2,100,000 . Purchases $700,000 5,000 Dividends lnterest income on U.S. Treasury bonds. . . . 10,000 . Salaries-officers 210,000 Salaries-sales and clerical 265,000 Repairs and Maintenance 20,000 5,000 Bad debt expense 14,000 lnterest expense Charitable contributions. 60,000 Depreciation (per books) 40,000 Advertising 14,000 Meals and Entertainment. 16,000 Taxes (state, local and payroll). . Life insurance premiums 50,000 10,000 Long term capital gain. 7,000 . 9,000 Federal income taxes paid 150,000 Long term capital loss . . The company provided the tollowing additional information. The corporation distributed a cash dividend of $60,000 during the year. Tax depreciation for the year was $50,000. Meals and entertainment includes the corporation's expense fbr a suite at Paul Brown Stadium, home of professional football's Cincinnati Bengals. The cost of the suite was $10,000, which includes event tickets of $4,000. The corporation's estimated bad debt expense fbr the year was $5,000. Actual bad debts were $ 1,000. Life insurance premiums were paid on term policies covering the lives of the two owners. The corporation is the beneliciary. Dividends received were from stock investment in less than20c/a owned U.S. corporations. The company took a physical count of its inventory on the last day of the year. On that date, it was determined that ending inventory was $360,000. This is not reflected in the iinancial statements above. Each of the lbur $37,500 timely rnade estimated tax payments were recorded as Federal income taxes paid. Prepare Form I 120 for the corporation. Please prepare a corporate tax return (federal only-Form 1120) for problem 1-33. Use 2013 forms because 2014 forms are not out yet. This will require workpapers and only two adjusting entries. DON'T use software! To save you some time I have prepared an Excel spreadsheet to assist you with the preparation of the workpapers. It has formulas that will help you as well. Don't complete the tax return until you have completed the workpapers. The completed Income Statement will tell you what line 28 of the tax return should be. Prepare your adjusting entries (separately numbered) and then post them to the workpapers. M-1 adjustments, which convert book numbers to tax numbers, are "onelegged" entries that only affect the income statement. They are not adjusting entries because the books are not incorrect for these items, and thus they are not given to the client. They are for tax purposes only. They are not numbered. Please submit the workpapers, adjusting entries and tax return. Prepare any other forms you think are necessary. The Adjusting Entry column is only for adjusting entries that will be made to the client's books, if any. The company does not keep their books on a tax basis. So Adjusting Entries are only for errors, additions or reclassifications, if any, that the client needs to know about. Adjusting entries always affect at least two accounts. For example, the Federal Income tax accrual has not been made. The $150,000 in expenses are the estimates paid this year. We don't know if the $150,000 is more or less than the actual tax. A tax accrual requires you to complete the worksheet and compute the tax due or refund, before actually completing the return. The ending inventory must be adjusted also. Don't prepare an Ohio corporate tax return or include state taxes in the federal accrual. In practice, including state taxes can sometimes be circular because the state taxes are deductible on the federal return and are included in the federal accrual. If state taxes are affected by the federal accrual, as they can be in Massachusetts, the calculation can become circular because you can't figure out the state tax accrual until you know the federal accrual and you can't figure out the federal accrual until you know the state accrual. But, you don't have to worry about state taxes for this problem (you can thank me later). The M-1 columns in the Income Statement sheet are for book-tax differences. These are items of expense that are not deductible or income that is not taxable, as well as items that differ in computation, such as depreciation. The final income statement columns should agree with your 1120 tax return. The balance sheet for an 1120 (Sch. L) is a book balance sheet, not a tax balance sheet. So, there are no "M-1" like adjustment columns in the balance sheet. The January 1, 2013 balance sheet is presented because you need it for the "Beginning of tax year" balance sheet numbers on Schedule L. Prepare the Schedule L, M-1 and M-2 even if not required to do so. There is an example of a completed form 1120 on page 1-43 of the text. A few hints on how to do the tax accrual in 1-33 (this is greatly simplified and applies to this problem only). First, make all your adjusting entries except for the tax accrual. In this problem that is only one entry. Second, make all your M-1 entries on the income statement sheet. These are differences between book and tax treatment of income or expenses. M-1 entries only affect income statement accounts. The offset is to the net income number line at the bottom so the two columns (Db and Cr.) balance. Third, note the final net income number (which will equal line 28 of the 1120 which is the same line referenced on the M-1) after you have made all adjusting entries and M-1 entries. Fourth, deduct the dividends received deduction (which comes after line 28). Then calculate the corporate income tax. Fifth, subtract the estimated taxes paid ($150,000) from the tax to get the balance due or refund. Create an adjusting entry to reflect this accrual. Do this first before doing the return. Your return should be identical. The Bike Shop, Inc. Worksheet As of 12/31/13 Balance sheet: Account Name Cash Accounts receivable Allowance for Doubtful Accounts U.S. Treasury bonds Stocks Inventory Equipment Land Building Accumulated Depreciation Accounts Payable Notes Payable Accrued Federal Income Taxes Capital stock Retained earnings (prior) Dividends Paid Current earnings Totals Dec. 31, 2013 TRIAL BALANCE Debit Credit 691,000 31,000 6,000 20,000 70,000 375,000 405,000 164,000 500,000 251,000 350,000 400,000 150,000 600,000 60,000 $2,316,000 559,000 2,316,000 ADJUSTMENTS Debit Credit 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Dec. 31, 2013 ADJUSTED TRIAL BALANCE Debit Credit 0 691,000 0 31,000 0 6,000 0 20,000 0 70,000 0 375,000 0 405,000 0 164,000 0 500,000 0 251,000 0 350,000 0 400,000 0 0 0 150,000 0 600,000 0 60,000 0 559,000 0 2,316,000 2,316,000 The Bike Shop, Inc. Worksheet For the year ended 12-31-13 Income Statement: Account Name Sales Purchases Inventory variances: Beginning inventory Ending inventory Advertising Bad debt expense Charitable contributions (cash) Depreciation Federal income taxes Interest expense Life insurance premiums Officers' salaries Repairs & Maintenance Salaries & wages - sales & clerical Taxes - state, local & payroll Meals & entertainment Long term capital gain Long term capital loss Dividend income Interest income Totals Net Income Dec. 31, 2013 TRIAL BALANCE Debit Credit 2,100,000 700,000 375,000 375,000 14,000 5,000 60,000 40,000 150,000 14,000 10,000 210,000 20,000 265,000 50,000 16,000 7,000 9,000 5,000 10,000 1,938,000 2,497,000 559,000 2,497,000 2,497,000 Dec. 31, 2013 ADJUSTED TRIAL BALANCE Debit Credit ADJUSTMENTS Debit Credit 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,100,000 700,000 375,000 375,000 14,000 5,000 60,000 40,000 150,000 14,000 10,000 210,000 20,000 265,000 50,000 16,000 7,000 9,000 5,000 10,000 1,938,000 2,497,000 0 559,000 0 2,497,000 2,497,000 SCHEDULE M -1 Debit Credit 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Form 1120 PAGE 1 INCOME/ EXPENSE Debit Credit 0 2,100,000 0 700,000 0 0 375,000 0 375,000 0 14,000 0 5,000 0 60,000 0 40,000 0 150,000 0 14,000 0 10,000 0 210,000 0 20,000 0 265,000 0 50,000 0 16,000 0 7,000 0 9,000 0 5,000 0 10,000 0 1,938,000 2,497,000 559,000 0 2,497,000 2,497,000 The Net Income number should equal line 28 of the 1120 after adjustments and M-1 entries
