XOen Company started business and incorporated on January 4, 2009.

The company was incorporated on 1/3/09, and uses a calendar year for book and tax purposes. It is a small corp. for AMT purposes.

1. The company has 6 unrelated owners:

1 2,000 shares

2 1,000 shares

3 500 shares

4 4,000 shares

5 1,500 shares

6 1,000 shares

The stock ownership has not changes since inception of the corporation.

2. The company is on the accrual basis of accounting, and uses a calendar reporting year. As a small wholesaler (under $10 million in average annual gross receipts), the company is not required to capitalize indirect costs into inventory. The balance sheet (Form 1120, Schedule L) is prepared using financial accounting.

3. Organizational costs of $15,200 are amortized over 60 months for both book and tax purposes.

4. The company uses the reserve method to estimate bad debts. Bad debts for book purposes were $ 25,436. For tax purposes, they are $5,911. There were no recoveries of previous debts written off.

5. Meals and entertainment expenses were incurred in the United States. The company has no business dealings in foreign countries.

6. Federal income taxes were paid in four equal, timely quarterly installments of

$300,000 each. For book purposes, an adjusting journal entry is also needed when the final amount of federal income tax is determined. Assume that no penalty will be incurred, and overpayments, if any, will result in a refund.

7. State franchise taxes payable at the end of the year were paid in January of the following year.

8. The company does not elect Section 179, but otherwise takes the maximum tax depreciation allowed.

9. Marketable securities were sold during the year, and consist of relatively small investments in large, publicly traded companies. 300 shares of Megacorp (purchased for $54,630 on November 12, 2010) were sold for $52,413 on September 22. Because of poor market conditions, extra cash flow was used to accelerate debt payments. Dividend income received is from stocks in which the company owns a less than 20% share.

10. The corporations charitable contributions were to various police associations.

11. Dividends of $25/share were declared and paid in December of this year.

12. The corporations beginning balance sheets is as follows:

	Balance sheet:	Last Years Dec. 31
		POSTCLOSE TRIAL BALANCE
	Account Name	Debit	Credit
	Cash	83,148
	Marketable Securities	23,174
	Accounts Receivable	151,970
	Allowance for Doubtful Accounts		3,034
	Inventory	74,045
	Machinery	720,343
	Accumulated Depreciation-Machinery		352619
	Furniture and Fixtures	18,652
	Accumulated Depreciation-F&F		11,768
	Building	449,920
	Accumulated Depreciation-Building		34,118
	Land	160,400
	Organizational Expenses, net	3.040
	Accounts Payable		39,482
	Payroll Taxes Payable		4,561
	Property Taxes payable		2,217
	Salaries & Wages Payable		13,204
	Federal Income Tax Payable		12,000
	State Franchise Tax Payable		9,237
	Notes Payable		200,632
	Mortgage Payable		338,854
	Common Stock ($1 par)		10,000
	Capital Paid in Excess of Par		140,095
	Retained Earnings		512,871
Totals		$1,696,852	$1,696,852

13. Notes and mortgage payable have both long- and short-term components. The short-term components are:

		Short-term		Short-term
		12/31/12		12/31/13
Note Payable		$114,620		$120,759
Mortgage Payable		42,617		46,714

14. This years balance sheet, from the trial balance is:

Balance sheet: 2013	Dec. 31, 2013
	TRIAL BALANCE
Account Name	Debit	Credit
Cash	1,678,081
Marketable securities	20,633
Accounts receivable	583,469
Allow, for doubtful accts.		14,912
Inventory	42,810
Building	449,920
Accumulated depreciation-Building		43,866
Machinery	720,343
Accumulated depreciation-Equipment		496,688
Office furniture & fixtures	18,652
Accumulated depreciation Furniture & fixtures		14,710
Land	160,400
Organizational expenditures	15,200
Accumulated amortization		15,200
Accounts payable		175,388
Federal income tax payable		0
Payroll taxes payable		7,968
Property taxes payable		51,460
Salaries & wages payable		2,342
State franchise tax payable		26,934
Notes payable		122,151
Mortgage payable		270344
Capital stock ($1 par)		10,000
Paid-in capital		140,095
Retained earnings (prior)		512,871
Dividends paid	1,200,000
Current earnings		2,984,579
TOTALS	4,889,508	4,889,508

15. Financial income statement data for the current year is shown below:

Income Statement:	Dec. 31,2013
	TRIAL BALANCE
Account Name	Debit	Credit
Sales		6,672,598
Sales returns & allowances	2,104
Purchases	1,215,726
Purchase discounts		18,438
Purchase returns & allowances		52,305
Inventory variance:
Beginning Inventory	74,045
Ending inventory		42,810
Capital Loss	2,217
Accident and health insurance	14,014
Accounting fees	8,240
Advertising	16,980
Amortization of organizational costs	3,040
Bad debt expense	25,436
Charitable contributions (cash)	92,511
Depreciation:
Building	9,748
Furniture & fixtures	2,942
Machinery	144,069
Federal Income taxes	1,200,000
Interest expense	82,761
Legal expenses	7,600
Office expense	22,057
Officers salaries:
Godwin	581,545
Cook	267,222
Payroll taxes	60,860
Property taxes	25,036
Rent expense (office equip.)	13,990
Repairs (machinery)	135,650
Salaries & wages:
Office salaries	178,880
Warehouse salaries	448,670
State franchise taxes	54,273
Telephone	14,795
Travel & entertainment:
Meals & entertainment	29,660
Other travel expenses	5,535
Utilities	92,016
Workers compensation insurance	27,388
Dividend income		30,823
TOTAL	4,859,010	6,816,974
NET INCOME	1,957,964
BALANCING TOTALS	6,816,974	6,816,974

16. Equipment ledgers for financial accounting purposes show the following:

	Date		Method/	Prior	Current
Asset	in service	Cost	Life	Depreciation	Depreciation
Building	07/11/2009	*449,920	SL/40	34,118	9,748
Machinery	03/18/2009	380,786	SL/5	321,498	76,158
Machinery	08/12/2011	214,497	SL/5	58,986	42,899
Machinery	09/06/2012	125,060	SL/5	6,253	25,012
Furniture	01/03/2009	**18,652	SL/6	8,826	2,942
*Salvage value = $60,000
**Salvage value = 1,000

17. Tax depreciation schedules form the prior year tax workpapers are presented below. (The current addition column has been added to each schedule.)

General Depreciation System
	Date		Method/	Prior	Current
Asset	in service	Cost	Life	Depreciation	Depreciation
Building	07/11/2009	449,920	SL/39	39,896	?
Machinery	03/18/2009	380,786	SL/7	261,840	?
Machinery	08/12/2011	214,497	SL/7	86,172	?
Machinery	09/06/2012	125,060	SL/7	17,866	?
Furniture	01/03/2009	18,652	SL/7	12,826	?
Alternative Depreciation System
	Date		Method/	Prior	Current
Asset	in service	Cost	Life	Depreciation	Depreciation
Building	07/11/2009	449,920	SL/40	38,899	?
Machinery	03/18/2009	380,786	SL/10	164,479	?
Machinery	08/12/2011	214,497	SL/7	58,603	?
Machinery	09/06/2012	125,060	SL/7	13,399	?
Furniture	01/03/2009	18,652	SL/10	8,057	?

Required:

1. Complete a worksheet showing the ending balance sheet and income statement for book purposes.

2. What causes the book and tax numbers for bad debt expense to be different? Are these differences temporary or reversing differences?

3. Sales are increasing at a rapid rate, raising concerns that UNICAP (Section 263A) will be required in the near-future year. What is UNICAP and how does it affect the tax return?

4. Because of the heavy repair costs, management wants to replace current machinery with now equipment. The equipment can be leased or bought. Terms of the lease are $500/month for 7 years with a $1 bargain purchase option at the end of the term. A new machine would cost $240,000, but last an estimated 10 years (which is equal to the AMT life). The bookkeeper has prepared an analysis of whether to buy or lease, and concluded that buying is cheaper. Review the analysis below. Do you concur with the bookkeepers analysis? (Assume a 10% cost of capital in your calculations.)

Purchase of Equipment

Purchase price $240,000

Less tax deductions:

2014 Section 179 24,000

2014 Depreciation 240,000

x .1429

34,298

58,296

Times: tax rate X 35%

Yearly tax effects (20,404)

Times: 10 yr life

Total tax payback (204.036)

Net cost of equipment - $35,964

Lease of Equipment

Monthly cost 2,000

Times: 12 months/year X12

Yearly cost 24,000 24,000

Times: tax rate X35%

Yearly tax effects (8,400)

Net yearly cost 15,600

Times: 10 yr life

Net cost of equipment 156,000

Cost of Lease 156,000

Less: Cost of Purchase (35.964)

Net savings - purchase 120,036