Prepare the tax form 1120, pages 1-6 using the following information and answer parts 2-4 as well.

PART II - Would this corporation be subject to an underpayment penalty? This question does not require a computation (in fact, you do not have enough information to compute the penalty). What is being requested is an explanation of the rule (and the exception, if applicable). Cite a source.

PART III - If you were an IRS agent doing an audit, what is the first issue that you would raise in your examination of this tax return (ignore the underpayment penalty issue)?

PART IV - Prepare an income statement based on GAAP with one modification: we will NOT be doing an adjusting entry for taxes.

DATA: On 10-1-1999, Billy Joe Ray Bob formed the Best Books Corporation to sell books. Pertinent information is presented below:

The business address is 351 South Street, Bug Tussle Alabama 35135.

The employer identification number is 57-351351; the principal business code is 351.

Billy Joe Ray Bob owns all of the outstanding common stock; no other class of stock is authorized. He is the president of the company and is a full-time employee of the corporation. His social security number is 351-35-1351.

The corporation uses the cash method of accounting and reports on a calendar year basis. Inventories are determined using the lower of cost or market method.

During the year, the corporation distributed a cash dividend of $30,000. Note that there is no dividend account on the pre-closing trial balance, which means that when the dividends were paid that they were debited directly to retained earnings.

The corporation has a NOL carryforward from the prior year of $100,000.

The following is the pre-closing trial balance (prior to the adjusting entry for tax expense) of the corporation as prepared by the accounting firm of Howell Dowe Cheatum (formed by former Arthur Andersen audit partners).

Account	Debit	Credit
Cash	$110,000
Inventory (see footnote 1)	300,000
Federal Bonds	100,000
State of Georgia Bonds	90,000
Pre-paid tax (see footnote 2)	7,000
Building	200,000
Accumulated depreciation		$130,000
Land	100,000
Loan payable to First National Bank		50,000
Common Stock		100,000
Retained Earnings		276,000
Sales		1,500,000
Sales returns and allowances	35,000
Cost-of-goods-sold (see footnote 1)	412,000
Dividend Income (see footnote 3)		5,000
Gain on sale of stock (see footnote 3)		100,000
Interest income: federal bonds		5,000
Interest income: state bonds		6,000
Salary president	400,000
Salaries other	250,000
Premiums of key-person life insurance (see footnote 4)	10,000
Payroll taxes	38,000
Depreciation Expense (see footnote 5)	30,000
Interest expense (see footnote 6)	40,000
Advertising	50,000
Totals	$2,172,000	$2,172,000

Notes:

1. The initial inventory was $200,000; purchases for the year were $512,000.

2. Estimated payments were made on December 1, 2019: $5,000 to the federal government and $2,000 to the state of Alabama. The Prepaid Taxes (an asset account) was debited when the payments were made. We will not be adjusting entries to the trial balance to include the adjusting entry for tax expense. Of course, you will have to prepare closing entries to close revenue and expense accounts into retained earnings.

3. The dividends were received from the Trump Corporation which is incorporated in New York (but, will soon move corporate headquarters to Florida)for tax and other reasons Best Books owned 5% of the outstanding stock of Trump at the time of the dividend which were paid in August 2019. The stock was purchased in January 2000 for $300,000 and was sold in December 2019 for $400,000.

4. There are actually two policies on the life of Billy Joe Ray Bob; one with his boyfriend as the beneficiary and one with Best Books as the beneficiary. The premiums are equally split between these two policies. Although there are several full-time employees, Billy Joe Ray Bob is the only one who is provided with this fringe benefit.

5. Depreciation expense per books was $30,000; for tax purposes it is $10,000.

6. The interest expense was on a loan to purchase the State of Georgia bonds.