MIKE'S SPORTING GOODS, INC. A "C" CORPORATION 1120 RETURN PROJECT

As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike's Sporting Goods, Inc.

Mike's Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC, all of whom were state champions in various sports.Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row. Mike won the state championship as a sprinter all four years of college.

Starting the company was Mike's idea, he owns the largest percentage of stock, and is the only owner who works in the business.The other three investors brought money to the table, but never planned on working in the sporting goods store.Therefore, no one questioned Mike when he suggested naming the corporation Mike's Sporting Goods, Inc.In addition, Mike has always had a strong desire to be known as the big guy on campus even after graduation.

Location As the old saying goes, Location, location, location.Luckily, Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses.After showing the location to the other investors, everyone agreed it would attract their target market of young athletic enthusiasts.As corporate officers, Mike and Juan signed a ten-year lease that required $9,200 per year in rent.

The building was built just a few years ago, so minimal expense was projected for maintenance and repairs.In 20Y5, Mike kept repairs expense down to $800, which really pleased Juan, Elroy, and Scott.

Corporate investments During 20Y5, Mike's Sporting Goods, Inc. received the following investment incomes:

! Interest from its own Accounts Receivables = $1,500 ! Interest from corporate bonds = $4,000 ! Interest from tax-exempt state bonds = $5,000 ! Dividends from various U.S. corporations = $10,000

o Mike's Sporting Goods, Inc. owns 20% of the stock of one corporation

Since Mike's Sporting Goods, Inc. did not have a net operating loss, its only entry on line 29 is the dividends-received deduction of $8,000 from Schedule C, page 2.

Year-end 20Y5, includes a $3,600 capital losses from the sale of securities.

Revenue from Sales The corporation, which uses an accrual basis of accounting on a calendar year, brought in $2,910,000 in gross sales in 20Y5.Just less than 1% of gross sales were returned, thus bringing net sales to $2,890,000.Thanks to Mike's purchasing savvy, cost of goods sold was $2,050,000, which is less than the industry standard of 80% of sales.

Other Expenses: Advertising While the stockholder's had intended on spending more on advertising, Mike only spent $8,700 and most of it was in Website development.

Bad debt expense The corporation uses the specific account write off method for uncollectible accounts receivable.A total of $1,600 in accounts receivable were written off in 20Y5.

Charitable contributions During the year, Mike's Sporting Goods, Inc. contributed $11,400 to the UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic Scholarship Fund.

Depreciation

On Line 8(a) of the Schedule M of the 1120, Mike's Sporting Goods, Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation's books.

Total depreciation from Form 4562 (not illustrated) is $17,600.$12,400 is included as cost of goods sold in Line 5 of the Form 1125-A.Enter the balance of $5,200 on line 20.Book Depreciation is $15,980.

Interest expense:Mike's Sporting Goods, Inc. incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up.Elroy is a securities broker with a national brokerage firm, therefore he handles all corporate investments.In 20Y5, the corporation accrued $27,200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds.

Salaries When the corporation was first formed, the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow.Thus, they agreed to pay Mike $55,000 per year, since he will manage the store, and $5,000 per year to the other stockholders.Thereby, total officers salaries will be $70,000 per year for the first five years. Hint: use Schedule E.

Since Mike will be handling the ordering, inventory management, and other administrative tasks, all employees will be in sales.Given the nature of sporting goods stores, everyone agreed the staff should be college students currently attending UMUC.Their goal was to keep wages below $50,000 per year.In 20Y5, Mike managed to keep total wages at $44,000.

All other expenses All other expenses of operating Mike's Sporting Goods, Inc. totals $78,300. These expenses include legal fees, office expenses, and sales commissions. Attach a schedule that itemizes these expenses to the return.

Taxes and credits Taxes:

At December 31, 20Y5, the corporation had $55,387 in accrued federal income taxes.

Mike's Sporting Goods, Inc. made four estimated tax payments totaling $69,117 as follows:

! $17,280 on 4/15/20Y5 ! $17,280 on 6/15/20Y5 ! $17,280 on 9/15/20Y5 ! $17,871 on 1/15/20Y6

See the cancelled checks in Appendix F.

Tax Credits:

The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs.Given the high unemployment rate of college students, Mike's Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit.Hint: use Form 5884.The credit will then carry over to the Schedule J of the 1120.

Reconciling Book to Return:

Mike's Sporting Goods, Inc. has the following non-deductible expenses on its Income Statement Per Books:

Premiums paid on term life insurance on corporate officers $9,500 Interest paid to purchase tax-exempt state bonds 850 Nondeductible contributions 500 Reduction of salaries by work opportunity credit6,000 Total $16,850

Deductible state and local taxes (not federal income tax) totaled $15,000

If Mike's Sporting Goods, Inc. owes income tax, the corporation will mail a check; if, otherwise, credit any overpayment to next years estimated taxes.

III.Steps to Completion:

Prepare IRS Form 1120

1. Prepare Schedules M-1: Reconciliation of Income (Loss) per Books with Income per Return using financial data in the Appendices. 2. Prepare Schedule M-2: Analysis of Unappropriated Retained Earnings per Books using financial data in the Appendices.

IV. Deliverables:

The following forms and schedules, combined as a single PDF document, are required:

! Form 1120 ! Form 4562: Depreciation and Amortization ! Schedule C: Total Special Deductions ! Schedule D: Net Long-Term Capital Gains or Losses ! Schedule J: Total Tax ! Schedule J: Total Payments and Credits ! Schedule K: Accuracy ! Schedule L: End of Tax Year: Total Liabilities and Stockholder's Equity ! Form 8949: Totals for Proceeds, Basis, & Gain/Loss ! Form 1125-A: Total for Cost of Goods Sold ! Form 3800: General Business Credit: Credit Allowed for the Current Year ! M-1 Income ! M-2 Balance at End of Year ! In addition, each student must separately submit their Group Contribution Report in their Assignment folder.

Appendices: Table of Contents

? Appendix A: Basic corporate information

? Appendix B: List of select Accounts and Balances per Book o (Financial basis, NOT tax basis)

? Appendix C: Income Statement per Bookso (Financial basis, not tax)

? Appendix D: Comparative Balance Sheet per Bookso (Financial basis, not tax)

? Appendix E: General Ledger Retained Earnings account in T-account format.

? Appendix F: Cancelled checks to the Internal Revenue Service for estimated quarterly tax payments

APPENDIX A:Basic corporate information

Corporate Name Mike's Sporting Goods, Inc. Corporate Address 422 Bruce Lane Annapolis, MD 21401

Federal Tax ID 52-9746858 Corporate officers:President/CEO Michael S. DukeVice President Juan Delaross Treasurer Elroy MulcaneSecretary Scott Barnett

APPENDIX B:List of select Accounts and Balances per Book (financial-basis, not tax basis). Account balances may or may not be reported on Form 1120. Hint:You will need these items to prepare Schedule M of the 1120.

Account Account Balance Advertising 8,700 Bad debts 1,600 Charitable Contributions to Not-for-Profit organizations 24,000 Charitable Contributions to political campaigns500 Compensation of officers 70,000 Cost of goods sold 2,050,000 Depreciation--indirect 3,580 Dividends received 10,000 Federal income tax accrued 55,387 Interest expense on note to buy tax-exempt state bonds 850 Interest expense on note to buy corporate bonds 27,200 Interest income on tax exempt state bonds 5,000 Interest income on taxable corporate bonds 5,500 Loss on securities 3,600 Maintenance and Repairs 800 Net income per books after tax 517,783 Other operating expenses 78,300 Premiums on life insurance 9,500 Proceeds from life insurance 9,500 Rental expense 9,200 Salaries and wages--indirect 44,000 Sales - gross 2,910,000 Sales returns and allowances 20,000 State and Local Taxes 15,000

APPENDIX C:Income Statement per Book (financial, not tax)

Mike's Sporting Goods, Inc. Income Statement (per Books) Year ending 20Y5Revenue:Gross sales $2,910,000Less: Returns & allowances20,000Net sales2,890,000Cost of goods sold2,050,000Gross Margin840,000Operating expenses:Advertising8,700Bad debt1,600Charitable contributions:Deductible 24,000Non-deductible 500 24,500Depreciation3,580Equipment rental9,200Life insurance9,500Maintenance & repairs800Officers compensation70,000Salaries and wages44,000Total operating expenses171,880 Operating Income668,120 Other revenue and gains:Dividend income10,000Interest income: Maryland bonds5,000Interest income: All other bonds5,500Proceeds from life insurance9,500Total other revenue and gains30,000Other expenses and losses:Accrued federal income taxes55,387Other operating expenses78,300Loss on investments3,600Total other expenses and losses137,287 Total income before interest and taxes560,833 Interest expense on note to purchase taxexempt bonds 850Interest expense on all other notes 27,200 28,050Income before tax532,783 Less: State & Local Income tax15,000 Net income per books after tax517,783

APPENDIX D: Comparative Balance Sheet per Books (financial, not tax)

Mike's Sporting Goods, Inc. Balance Sheet per Books December 31, 20Y4 and 20Y5

Year Ending 20Y4 Year ending 20Y5 Assets Cash114,700329,564 Accounts receivable (net)98,400235,001 Inventory426,000495,479 Tax-exempt securities100,000120,000 Other current assets26,30017,266 Other investments100,00080,000 Buildings 272,400296,700Accumulated depreciation 88,300 184,100 104,280 192,420 Land20,00020,000 Other assets14,80019,300 Total assets1,084,3001,509,030Liabilities & Stockholder's Equity Accounts payable428,500334,834 Notes payable (short term)4,3004,300 Other current liabilities6,8007,400 Notes payable (long term)176,700264,100Stockholder's Equity Common stock200,000200,000 Retained earnings: Appropriated30,00040,000 Retained earnings: Unappropriated238,000658,396 Total liabilities & Stockholder's equity1,084,3001,509.030

APPENDIX E: General ledger Retained Earnings account in T-account format

General Ledger Retained Earnings Account Explanations: Debits Credits Explanations: Contingencies 10,000 238,000 Beg balance Accrued income tax 55,387 532,783 Net Income before tax Dividends paid 65,000 18,000 Income tax refund Ending balance658,396

APPENDIX F: Canceled checks

! 8.4 Decision Making: Apply tax laws, regulations, and court cases to individual situations, identifying and communicating planning opportunities and compliance needs. MIKE'S SPORTING GOODS, INC. A "C" CORPORATION 1120 RETURN PROJECT As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike's Sporting Goods, Inc. Mike's Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC, all of whom were state champions in various sports. Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row. Mike won the state championship as a sprinter all four years of college. Starting the company was Mike's idea, he owns the largest percentage of stock, and is the only owner who works in the business. The other three investors brought money to the table, but never planned on working in the sporting goods store. Therefore, no one questioned Mike when he suggested naming the corporation Mike's Sporting Goods, Inc. In addition, Mike has always had a strong desire to be known as the big guy on campus even after graduation. Location As the old saying goes, Location, location, location. Luckily, Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses. After showing the location to the other investors, everyone agreed it would attract their target market of young athletic enthusiasts. As corporate officers, Mike and Juan signed a ten-year lease that required $9,200 per year in rent. The building was built just a few years ago, so minimal expense was projected for maintenance and repairs. In 20Y5, Mike kept repairs expense down to $800, which really pleased Juan, Elroy, and Scott. Corporate investments During 20Y5, Mike's Sporting Goods, Inc. received the following investment incomes: ! ! ! ! Interest from its own Accounts Receivables = $1,500 Interest from corporate bonds = $4,000 Interest from tax-exempt state bonds = $5,000 Dividends from various U.S. corporations = $10,000 o Mike's Sporting Goods, Inc. owns 20% of the stock of one corporation Since Mike's Sporting Goods, Inc. did not have a net operating loss, its only entry on line 29 is the dividends-received deduction of $8,000 from Schedule C, page 2. Year-end 20Y5, includes a $3,600 capital losses from the sale of securities. Revenue from Sales The corporation, which uses an accrual basis of accounting on a calendar year, brought in $2,910,000 in gross sales in 20Y5. Just less than 1% of gross sales were returned, thus bringing net sales to $2,890,000. Thanks to Mike's purchasing savvy, cost of goods sold was $2,050,000, which is less than the industry standard of 80% of sales. Other Expenses: Advertising While the stockholder's had intended on spending more on advertising, Mike only spent $8,700 and most of it was in Website development. Bad debt expense The corporation uses the specific account write off method for uncollectible accounts receivable. A total of $1,600 in accounts receivable were written off in 20Y5. Charitable contributions During the year, Mike's Sporting Goods, Inc. contributed $11,400 to the UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic Scholarship Fund. Depreciation On Line 8(a) of the Schedule M of the 1120, Mike's Sporting Goods, Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation's books. Total depreciation from Form 4562 (not illustrated) is $17,600. $12,400 is included as cost of goods sold in Line 5 of the Form 1125-A. Enter the balance of $5,200 on line 20. Book Depreciation is $15,980. Interest expense: Mike's Sporting Goods, Inc. incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up. Elroy is a securities broker with a national brokerage firm, therefore he handles all corporate investments. In 20Y5, the corporation accrued $27,200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds. Salaries When the corporation was first formed, the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow. Thus, they agreed to pay Mike $55,000 per year, since he will manage the store, and $5,000 per year to the other stockholders. Thereby, total officers salaries will be $70,000 per year for the first five years. Hint: use Schedule E. Since Mike will be handling the ordering, inventory management, and other administrative tasks, all employees will be in sales. Given the nature of sporting goods stores, everyone agreed the staff should be college students currently attending UMUC. Their goal was to keep wages below $50,000 per year. In 20Y5, Mike managed to keep total wages at $44,000. All other expenses All other expenses of operating Mike's Sporting Goods, Inc. totals $78,300. These expenses include legal fees, office expenses, and sales commissions. Attach a schedule that itemizes these expenses to the return. Taxes and credits Taxes: At December 31, 20Y5, the corporation had $55,387 in accrued federal income taxes. Mike's Sporting Goods, Inc. made four estimated tax payments totaling $69,117 as follows: ! ! ! ! $17,280 on 4/15/20Y5 $17,280 on 6/15/20Y5 $17,280 on 9/15/20Y5 $17,871 on 1/15/20Y6 See the cancelled checks in Appendix F. Tax Credits: The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs. Given the high unemployment rate of college students, Mike's Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit. Hint: use Form 5884. The credit will then carry over to the Schedule J of the 1120. Reconciling Book to Return: Mike's Sporting Goods, Inc. has the following non-deductible expenses on its Income Statement Per Books: Premiums paid on term life insurance on corporate officers Interest paid to purchase tax-exempt state bonds Nondeductible contributions Reduction of salaries by work opportunity credit Total $9,500 850 500 6,000 $16,850 Deductible state and local taxes (not federal income tax) totaled $15,000 If Mike's Sporting Goods, Inc. owes income tax, the corporation will mail a check; if, otherwise, credit any overpayment to next years estimated taxes. III. Steps to Completion: Prepare IRS Form 1120 1. Prepare Schedules M-1: Reconciliation of Income (Loss) per Books with Income per Return using financial data in the Appendices. 2. Prepare Schedule M-2: Analysis of Unappropriated Retained Earnings per Books using financial data in the Appendices. IV. Deliverables: The following forms and schedules, combined as a single PDF document, are required: ! ! ! ! ! ! ! ! ! ! ! ! ! ! Form 1120 Form 4562: Depreciation and Amortization Schedule C: Total Special Deductions Schedule D: Net Long-Term Capital Gains or Losses Schedule J: Total Tax Schedule J: Total Payments and Credits Schedule K: Accuracy Schedule L: End of Tax Year: Total Liabilities and Stockholder's Equity Form 8949: Totals for Proceeds, Basis, & Gain/Loss Form 1125-A: Total for Cost of Goods Sold Form 3800: General Business Credit: Credit Allowed for the Current Year M-1 Income M-2 Balance at End of Year In addition, each student must separately submit their Group Contribution Report in their Assignment folder. Appendices: Table of Contents Appendix A: Basic corporate information Appendix B: List of select Accounts and Balances per Book o (Financial basis, NOT tax basis) Appendix C: Income Statement per Books o (Financial basis, not tax) Appendix D: Comparative Balance Sheet per Books o (Financial basis, not tax) Appendix E: General Ledger Retained Earnings account in T-account format. Appendix F: Cancelled checks to the Internal Revenue Service for estimated quarterly tax payments APPENDIX A: Basic corporate information Corporate Name Mike's Sporting Goods, Inc. Corporate Address 422 Bruce Lane Annapolis, MD 21401 Federal Tax ID 52-9746858 Corporate officers: President/CEO Michael S. Duke Vice President Juan Delaross Treasurer Elroy Mulcane Secretary Scott Barnett APPENDIX B: List of select Accounts and Balances per Book (financial-basis, not tax basis). Account balances may or may not be reported on Form 1120. Hint: You will need these items to prepare Schedule M of the 1120. Account Account Balance Advertising 8,700 Bad debts 1,600 Charitable Contributions to Not-for-Profit organizations Charitable Contributions to political campaigns Compensation of officers Cost of goods sold Depreciation--indirect 24,000 500 70,000 2,050,000 3,580 Dividends received 10,000 Federal income tax accrued 55,387 Interest expense on note to buy tax-exempt state bonds Interest expense on note to buy corporate bonds 850 27,200 Interest income on tax exempt state bonds 5,000 Interest income on taxable corporate bonds 5,500 Loss on securities 3,600 Maintenance and Repairs Net income per books after tax 800 517,783 Other operating expenses 78,300 Premiums on life insurance 9,500 Proceeds from life insurance 9,500 Rental expense 9,200 Salaries and wages--indirect Sales - gross 44,000 2,910,000 Sales returns and allowances 20,000 State and Local Taxes 15,000 APPENDIX C: Income Statement per Book (financial, not tax) Mike's Sporting Goods, Inc. Income Statement (per Books) Year ending 20Y5 Revenue: Gross sales Less: Returns & allowances Net sales Cost of goods sold Gross Margin Operating expenses: Advertising Bad debt Charitable contributions: Deductible Non-deductible Depreciation Equipment rental Life insurance Maintenance & repairs Officers compensation Salaries and wages Total operating expenses Operating Income Other revenue and gains: Dividend income Interest income: Maryland bonds Interest income: All other bonds Proceeds from life insurance Total other revenue and gains Other expenses and losses: Accrued federal income taxes Other operating expenses Loss on investments Total other expenses and losses Total income before interest and taxes Interest expense on note to purchase taxexempt bonds Interest expense on all other notes Income before tax Less: State & Local Income tax Net income per books after tax $ 2,910,000 20,000 2,890,000 2,050,000 840,000 8,700 1,600 24,000 500 24,500 3,580 9,200 9,500 800 70,000 44,000 171,880 668,120 10,000 5,000 5,500 9,500 30,000 55,387 78,300 3,600 137,287 560,833 850 27,200 28,050 532,783 15,000 517,783 APPENDIX D: Comparative Balance Sheet per Books (financial, not tax) Mike's Sporting Goods, Inc. Balance Sheet per Books December 31, 20Y4 and 20Y5 Year Ending 20Y4 Assets Cash Accounts receivable (net) Inventory Tax-exempt securities Other current assets Other investments Buildings Accumulated depreciation Land Other assets Total assets Liabilities & Stockholder's Equity Accounts payable Notes payable (short term) Other current liabilities Notes payable (long term) Stockholder's Equity Common stock Retained earnings: Appropriated Retained earnings: Unappropriated Total liabilities & Stockholder's equity Year ending 20Y5 114,700 98,400 426,000 100,000 26,300 100,000 272,400 88,300 184,100 20,000 14,800 1,084,300 329,564 235,001 495,479 120,000 17,266 80,000 296,700 104,280 192,420 20,000 19,300 1,509,030 428,500 4,300 6,800 176,700 334,834 4,300 7,400 264,100 200,000 30,000 238,000 200,000 40,000 658,396 1,084,300 1,509.030 APPENDIX E: General ledger Retained Earnings account in T-account format Explanations: General Ledger Retained Earnings Account Debits Credits Explanations: Contingencies 10,000 238,000 Beg balance Accrued income tax 55,387 532,783 Net Income before tax 65,000 18,000 Income tax refund Dividends paid Ending balance 658,396 APPENDIX F: Canceled checks