JohnnyCakes, Inc. is a calendar year accrual basis taxpayer; it manufactures industrial water pumps. It has the following financial information for the 2018 taxable year:

Balance Sheet

BeginningEnding

Cash

$123,000$160,350

Accounts Receivable

220,000260,000

Less:Allowance for Doubtful Accounts

(40,000)(50,000)

Inventory

90,00095,000

Less:Reserve for Obsolesence

(10,000)(12,000)

Prepaid Insurance

4,0002,000

Current Assets

$387,000$455,350

Land

$70,000$70,000

Building

630,000630,000

Machinery and Equipment

140,000165,000

Furniture and Fixtures

40,00055,000

Total

$880,000$920,000

Less:Accumulated Depreciation

(260,000)(294,000)

Net Fixed Assets

$620,000$626,000

Note Receivable

$300,000$200,000

Total Assets

$1,307,000$1,281,350

Accounts Payable

$45,000$48,000

Accrued Expenses

30,00035,000

Deferred Revenue

8,0006,000

Reserve for Warranty Expenses

15,00012,000

Accrued Bonus

100,00070,000

Current Liabilities

$198,000$171,000

Long-Term Debt

$500,000$500,000

Total Liabilities

$698,000$671,000

Equity:

Common Stock

$1,000$1,000

Additional Paid in Capital

4,0004,000

Retained Earnings

604,000605,350

Total Equity

$609,000$610,350

Total Liabilities and Equity

$1,307,000$1,281,350

Income Statement

Gross Sales

$1,200,000

Cost of Goods Sold (650,000)

Gross Margin $550,000

Selling, General, and Administrative Expenses: Bad Debt $15,000

Depreciation

4,000

Wages and Salaries

220,000

Other

280,000

$519,000

Operating Income

$31,000

Other Income (Expenses):

Interest Income

$500

Gain on Sale of Land

-

Interest Expense

(30,000)

Total Other Income (Expense)

$(29,500)

Net Income Before Tax

$1,500

Federal Income Tax

(150)

Net Income

$1,350

Cash Flow

Net Income

$1,350

Add:Depreciation

34,000

Subtotal

$35,350

Change in Working Capital:

Accounts Receivable, Net

(30,000)

Inventory, Net

(3,000)

Prepaid Insurance

2,000

Accounts Payable

3,000

Accrued Expenses

5,000

Deferred Revenue

(2,000)

Reserve for Warranty Expense

(3,000)

Accrued Bonus

(30,000)

Cash From Operations

$(22,650)

Purchase of Fixed Assets

$(40,000)

Collection on Note Receivable

100,000

Cash From Investing Activities

$60,000

Change in Cash

$37,350

Cash, Beginning

123,000

Cash, Ending

$160,350

Notes:

1.JohnnyCake wrote off $5,000 of acccounts receivable against the reserve in 2018

2.Prepaid insurance at the beginning of the year represented the unrecovered portion of a three year premium for $6,000 covering the period January 2017 through December 2019.

3.JohnnyCake sold $100,000 of excess land to an unrelated third party for $400,000 in 2017.

The sale called for $100,000 cash paid at closing and a note for $300,000 payable in three (3) equal installments of $100,000 each on the anniversary date of the sale.The note provided for adequate stated interest.

4.The bonus payable represents a bonus accrued each year to the 90 percent shareholder.All bonuses are paid by March 15 of the following year.

5.The company shipped inventory to a customer on December 31, 2018 for $100,000.

Pursuant to the contract, title passes to the customer on receipt. The client received the goods on January 4, 2019. The company booked the sale in 2018, when shipped, to improve their financial statements for the bank.The goods shipped has a cost basis of $60,000.

6.JohnnyCake incurred $35,000 of expenses attributable to the improvement of the

building (added a new office; completed October 1, 2018).The company deducted the payments as a repair expense in its 2018 financial statements.

7.The company uses full absorption accounting for its inventories.

8.The company used the simplified production method for UNICAP purposes. It has not elected out of UNICAP for 2018 despite having gross receipts less than $25 million.

9.JohnnyCake had $6,000 of UNICAP expenses capitalized for tax purposes at the beginning of the year. For 2018, it had $20,000 of mixed service department costs and $15,000 of other indirect UNICAP costs.

10.Deferred revenue represents $10,000 received in 2017 for a 5 year supply of pumps. JohnnyCake used the deferral method in 2017 and recognized $2,000 of revenue in its audited financial statements for 2017 and 2018.

11.MACRS depreciation on beginning of year assets is $42,000.

Complete Schedule M-1 (not M-3) for 2018 based on the above information. Provide a brief description/narrative and authority for each of the adjustments.

In addition, provide a list of other questions you would need/want to ask JohnnyCake, Inc. to accurately compute taxable income.