Required:

• Complete Jorges Music Inc.s (JMI) 2021 Form 1120, Schedules C, D, G, J, K, L, M-1 and M-2 using the information provided below. Schedules D and G have separate forms.
• Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120.
• If any information is missing, use reasonable assumptions to fill in the gaps.
• The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms.

Facts:

Jorges Music Inc. (JMI) was formed in 2009 by Jorge Hernandez and Betsy Smith. Jorge and Betsy officially incorporated their store on June 12, 2010. JMI sells (retail) all kinds of music-related products including musical instruments, sheet music and recordings. Jorge owns 70 percent of the outstanding common stock of JMI, and Betsy owns the remaining 30 percent.

• JMI is located at 655 Appleton Way, San Bernadino, California 94303.
• JMIs Employer Identification Number is 29-5744459.
• JMIs business activity is retail sales of music-related products. Its business activity code is 451140.
• Officers of the corporation are as follows:
  • Jorge is the chief executive officer and president (Social Security number 123-45-6789).
  • Betsy is the executive vice president (Social Security number 978-65-4321).
  • Geraldine Merhi is the vice president over operations (Social Security number 789-12-3456).
  • Carlson Nelson is the secretary (Social Security number 321-54-6789).
• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
• Neither Geraldine nor Carlson owns any stock in JMI.
• JMI uses the accrual method of accounting and has a calendar year-end.
• JMI made four equal estimated tax payments of $43,000 each. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, JMI would like to receive a refund.
• JMI paid a dividend of $70,000 to its shareholders on December 1. JMI had sufficient earnings and profits (E&P) to absorb the distribution.

The following is JMIs audited income statement for 2021:

JMI Income Statement For year ending December 31, 2021
Revenue from sales	$ 3,420,000
Sales returns and allowances	(40,000)
Cost of goods sold	(834,000)
Gross profit from operations	$ 2,546,000
Other income:
Capital gains	$ 8,000
Gain from disposition of fixed assets	2,000
Dividend income	12,000
Interest income	15,000
Gross income	$2,583,000
Expenses:
Compensation	$(1,300,000)
Depreciation	(20,000)
Bad debt expense	(15,000)
Meals	(5,000)
Maintenance	(7,000)
Charitable donations	(27,000)
Property taxes	(45,000)
State income taxes	(60,000)
Other taxes	(56,000)
Interest	(62,000)
Advertising	(44,000)
Professional services	(32,000)
Pension expense	(40,000)
Supplies	(6,000)
Other expenses	(38,000)
Total expenses	(1,757,000)
Income before taxes	826,000
Federal income tax expense	(260,000)
Net income after taxes	$ 566,000

Notes:

1. JMI has a capital loss carryover to this year from last year in the amount of $5,000.
2. JMIs inventory-related purchases during the year were $1,134,000. JMI values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to JMI.
3. Of the $15,000 interest income, $2,500 was from a City of Fremont bond issued in 2016, $4,500 was from a Pleasanton city bond issued in 2017, $3,000 was from a U.S. Treasury bond, and the remaining $5,000 was from a money market account.
4. JMI sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cumulative total of $4,000 of book depreciation on the asset and a cumulative total of $7,000 of tax depreciation. For tax purposes, the entire gain was recaptured as ordinary income under 1245.
5. JMIs dividend income came from Simons Sheet Music. JMI owned 15,000 shares of the stock in Simons Sheet Music (SSM) at the beginning of the year. This represented 15 percent of the SSM outstanding stock.
6. On July 22, 2021, JMI sold 2,500 shares of its Simons Sheet Music stock for $33,000. It had originally purchased these shares on April 24, 2014, for $25,000. After the sale, JMI owned 12.5 percent of Simons Sheet Music.
7. JMIs compensation is as follows:
   • Jorge, $210,000
   • Betsy, $190,000
   • Geraldine, $110,000
   • Carlson, $90,000
   • Other, $700,000
8. JMI wrote off $10,000 in accounts receivable as uncollectible during the year.
9. Tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A.
10. Of the $62,000 of interest expense, $56,000 was from the mortgage on JMIs building and the remaining $6,000 of interest was from business-related loans.
11. The pension expense is the same for both book and tax purposes.
12. Other expenses include $3,000 for premiums paid on term life insurance policies for which JMI is the beneficiary. The policies cover the lives of Jorge and Bets.
13. The following are JMIs audited balance sheets as of January 1, 2021, and December 31, 2021:

14. 	2021
    	January 1	December 31
    Assets
    Cash	$ 240,000	$ 179,000
    Accounts receivable	600,000	700,000
    Allowance for doubtful accounts	(35,000)	(40,000)
    Inventory	1,400,000	1,700,000
    U.S. government bonds	50,000	50,000
    State and local bonds	140,000	140,000
    Investments in stock	300,000	275,000
    Building and other depreciable assets	1,500,000	1,600,000
    Accumulated depreciation	(200,000)	(216,000)
    Land	900,000	900,000
    Other assets	250,000	270,000
    Total assets	$5,145,000	$5,558,000
    Liabilities and Shareholders Equity
    Accounts payable	$ 250,000	$ 220,000
    Other current liabilities	125,000	120,000
    Mortgage	800,000	790,000
    Other liabilities	200,000	162,000
    Capital stock	600,000	600,000
    Retained earnings	3,170,000	3,666,000
    Total liabilities and shareholders equity	$5,145,000	$5,558,000