Need help with Tax Return Problem 1

The Snap-It-Open Corporation incorporated and began operations on January 05 of the current year. Its address is 3701 Commerce Drive, Baltimore, MD 23239. Its employer identification number is 69-7414447. It elects to file its initial tax returns as a calendar-year corporation and uses the accrual method of accounting. It elects the FIFO method of inventory valuation. Jason Sprull (SSN 333-33-3333) and Martin Winsock (SSN 555-55-5555) formed the business. They each contributed $250, 000 cash for 50 percent of the 100, 000 shares of $1 par value stock issued and outstanding. The company was formed to assemble and market a unique, compact, snap-open umbrella and its business activity code is 339900. These umbrellas are sold to a variety of organizations as premiums. The company purchases the umbrella frames and several types of waterproof fabric for the umbrella material and covers from various manufacturers. It prints the organizations' advertising logos or other designs on the umbrella material and covers. It then assembles these of the umbrella frames for delivery to the customer along with the covers. On January 16, the company placed in service two new machines that they had purchased for $250, 000 each for printing and cutting the fabric for the umbrellas and two used umbrella assembly machines purchased for $200, 000 each. The company obtained a bank loan of 750, 000 secured by the machines. Jason and Martin were required to personally guarantee this loan that has an 8 percent annual interest rate on the unpaid balance. The first principal and interest payment of $160, 000 is not due until January 16 of next year. During the year, the company purchased $250, 000 of fabric and $310, 000 of umbrella frames. It returned one order of frames valued at $5,000 because of a defect in the snap-open mechanism and received a cash refund for that amount. Both Jason and Martin work full-time in the business. Jason is the salesperson for the company and Martin manages the office and the printing and assembly operations. Each receives a salary of $60, 000 per year. They have six employees with the following incomes for the year $45,000 for an accountant: $21, 000 for a receptionist; $28,000 for each of two print machine operators; and $25,000 for each of two assembly machine operators. There are no accrued salaries or taxes as of the end of the current year. FUTU taxes are assessed on the first $7,000 of wages at a rate of 6.0 percent. By the end of the year, the company had $1,935,000 in umbrella sales, collected $1,430, 000 on these sales, and paid the following expenses in cash: As an accrual basis taxpayer, the company recognized $57,500 in interest expense on the note ($750, 000 times .08 times 11.5/12) and established an allowance account for bad debts equal to two percent of sales. They recognized depreciation expense for financial accounting equal to 10 percent of the purchase for the new printing machines and 12.5 percent of the purchase price for the used assembly machines. Their inventory at year-end consisted of $65,000 of fabric and $68,000 of umbrella frames based on the FIFO inventory method. (For simplicity, you are only required to allocate the factory salaries to the calculation of cost of goods sold.) The company made estimated tax payments of $40, 000 for the year. Prepare a financial accounting income statement (before income tax) and balance sheet for Snap-It-Open Corporation for the current year. (Do not forget to compute FICA and FUTA taxes for all employees.) Complete a Form 1120 and Form 4562 for Snap-It-Open Corporation using the following additional information. The corporation wrote off no bad debts for the year and it maximized its cost recovery deductions on the four machines purchased. Use the latest available tax forms from the IRS The Rite-Way Plumbing Company began business three years ago as of March 1 of the current tax year in Sarasota. Its business address is 124 Division Lane, Sarasota, FL 33645. Its employer identification number is 69-3456789. Its principal business activity is residential plumbing repairs and maintenance; its business code is 238220. It files its income tax returns on the calendar-year basis. The business was formed as a limited partnership by two brothers, John Henry (SSN 555-55-5555) and James Henry (SSN 666-66-6666), who work full-time in the business, and their father Tom Henry (SSN 888-88-8888), the limited partner. The brothers each have a 25 percent interest in the income, loss, and capital of the business while their father owns a 50 percent interest in income, loss, and capital, but takes no active interest in the business other than as that of an investor. At the end of the current year, its operations showed cash gross receipts of $1, 240, 000 and the following cash expenditure items