On November1 ,2005, Janet Morton and Kim Wong formed Pet Kingdom,Inc.,to sell pets and pet supplies. Pertinent information regarding PetKingdom is summarized as follows:

Pet Kingdoms business address is 1010 Northwest Parkway, Dallas, TX 75225; its telephone number is (214) 555-2211; and its e-mail address is petkingdom@pki.com. The employer identification number is 11-1111111, and the principal businessactivity code is 453910.

Janet and Kim each own 50% of the common stock; Janet is president and Kim is vice president of the company. No other class of stock is authorized.

Both Janet and Kim are full-time employees of Pet Kingdom. Janets Social Security number is 123-45-6789, and Kims Social Security number is 987-65-4321.

Pet Kingdom is an accrual method, calendar year taxpayer.

Inventories are determined using FIFO and the lower of cost or market method.

Pet Kingdom uses thestraight-line method of depreciation for book purposes and accelerated depreciation (MACRS) for tax purposes.

During 2014, the corporation distributed cash dividends of $250,000.

Pet Kingdoms financial statements for 2014 are shown below.

Income Statement

Income

Gross sales $ 5,750,000

Sales returns and allowances (200,000)

Net sales $ 5,550,000

Cost of goods sold (2,300,000)

Gross profit $ 3,250,000

Dividends received from stock investments

in less-than-20%-owned U.S. corporations 43,750

Interest income:

State bonds $ 15,000

Certificates of deposit 20,000 35,000

Total income $ 3,328,750

Expenses Salariesofficers

Janet Morton $262,500

Kim Wong 262,500 $525,000

Salariesclerical and sales 725,000

Taxes (state, local, and payroll) 238,000

Repairs and maintenance 140,000

Interest expense:

Loan to purchase state bonds $ 9,000

Other business loans 207,000 216,000

Advertising 58,000

Rental expense 109,000

Depreciation* 106,000

Charitable contributions 38,000

Employee benefit programs 60,000

Premiums on term life insurance policies on lives

of Janet Morton and Kim Wong;

Pet Kingdom is thedesignated beneficiary 40,000

Total expenses (2,255,000)

Net income before taxes $ 1,073,750

Federal income tax (356,023)

Net income per books $ 717,727

Balance Sheet Assets January 1, 2014 December 31, 2014

Cash $ 1,200,000 $ 1,037,750

Trade notes and accounts receivable 2,062,500 2,147,000

Inventories 2,750,000 3,030,000

Stock investment 1,125,000 1,125,000

State bonds 375,000 375,000

Certificates of deposit 400,000 400,000

Prepaid Federal tax 0 3,977

Buildings and other depreciable assets 5,455,000 5,455,000

Accumulated depreciation (606,000) (712,000)

Land 812,500 812,500

Other assets 140,000 128,500

Total assets $13,714,000 $13,802,727

Liabilities and Equity January 1, 2014 December 31, 2014

Accounts payable $ 2,284,000 $ 1,975,000

Other current liabilities 175,000 155,000

Mortgages 4,625,000 4,575,000

Capital stock 2,500,000 2,500,000

Retained earnings 4,130,000 4,597,727

Total liabilities and equity $13,714,000 $13,802,727

During 2014, Pet Kingdom made estimated tax payments of $90,000 each quarter tothe IRS.

Prepare a Form 1120 for Pet Kingdom for tax year 2014.

from chapter 2 of federal taxation 2016: corporations, partnerships, estates and trusts.

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