TAX FORM/RETURN PREPARATION PROBLEMS
C:3-66
Melodic Musical Sales, Inc. is located at 5500 Fourth Avenue, City, ST 98765. The corporation uses the calendar year and accrual basis for both book and tax purposes. It is engaged in the sale of musical instruments with an employer identification number (EIN) of XX-2014012. The company incorporated on December 31, 2008, and began business on January 2, 2009. Table C:3-4 contains balance sheet information at January 1, 2012, and December 31, 2012. Table C:3-5 presents an income statement for 2012. These schedules are presented on a book basis. Other information follows the tables.
Estimated Tax Payments (Form 2220): The corporation deposited estimated tax payments as follows:
| April 17, 2012 | $110,000 |
| June 15, 2012 | 221,000 |
| September 17, 2012 | 265,000 |
| December 17, 2012 | 265,000 |
| Total | $861,000 |
Some dates are the 17th because the 15th and 16th fall on a weekend or holiday. Taxable income in 2011 was $1.5 million, and the 2011 tax was $510,000. The corporation C3-65C3-66earned its 2012 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods.
TABLE C:3-4 Melodic Musical Sales, Inc.—Book Balance Sheet Information
JANUARY 1, 2012 DECEMBER 31, 2012
ACCOUNT DEBIT CREDIT DEBIT CREDIT
CASH 193,116 226,823
ACCOUNTS RECEIVABLE 441,180 513,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS 22,059 25,650
INVENTORY 2,375,000 3,325,000
INVESTMENT IN CORPORATE STOCK 265,000 110,000
INVESTMENT IN MUNICIPAL BONDS 32,000 32,000
NET CURRENT DEFERRED TAX ASSET 10,220 8,721
CASH SURRENDER VALUE OF INS POLICY 42,000 54,000
LAND 300,000 300,000
BUILDINGS 1,400,000 1,400,000
ACCUMULATED DEPRECIATION-BUILDINGS 70,000 98,000
EQUIPMENT 960,000 2,640,000
ACCUMULATED DEPRECIATION-EQIPMENT 160,000 249,333
TRUCKS 250,000 250,000
ACCUMULATED DEPRECIATION-TRUCKS 75,000 125,000
ACCOUNTS PAYABLE 300,000 270,000
NOTES PAYABLE (SHORT-TERM) 610,000 488,000
ACCRUED PAYROLL TAXES 14,250 17,812
ACCRUED STATE INCOME TAXES 8,550 14,250
ACCRUED FEDERAL INCOME TAXES - 116,693
BONDS PAYABLE (LONG TERM) 2,000,000 2,300,000
NET NONCURRENT DEFERRED LIABILITY TAX 158,657 284,588
CAPITAL STOCK-COMMON 950,000 950,000
RETAIN EARNINGS-UNAPROPRIATE 1,900,000 3,920,218
TOTALS 6,268,516 6,268,516 8,859,544 8,859,544
Inventory and Cost of Goods Sold (Form 1125-A):
The corporation uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected on Form 1125-A. No other costs or expenses are allocated to cost of goods sold. Note: The corporation is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous three years was less than $10 million.
| Line 9 (a) | Check (ii) |
| (b), (c) & (d) | Not applicable |
| (e) & (f) | No |
Compensation of Officers (Form 1125-E):
| a) | (b) | (c) | (d) | (f) |
| Mary Travis | XXX-XX-XXXX | 100% | 50% | $277,000 |
| John Willis | XXX-XX-XXXX | 100% | 25% | 170,000 |
| Chris Parker | XXX-XX-XXXX | 100% | 25% | 170,000 |
| Total |
| $617,000 | ||
Bad Debts:
For tax purposes, the corporation uses the direct writeoff method of deducting bad debts. For book purposes, the corporation uses an allowance for doubtful accounts. During 2012, the corporation charged $38,000 to the allowance account, such amount representing actual writeoffs for 2012.
C3-66C3-67
TABLE C: 3-5 Melodic Musical Sales, Inc.—Book Income Statement 2012
SALES 9,500,000
RETURNS (237,500)
NET SALES 9,262,500
BEGINNING INVENTORY 2,375,000
PURCHASES 5,225,000
ENDING INVENTORY (3,325,000)
COST OF GOODS SOLD (4,275,000)
GROSS PROFIT 4,987,500
EXPENSES
AMORTIZATION 0
DEPRECIATION 231,333
REPAIRS 19,760
GENERAL INS. 52,250
NET PREMIUM-OFF-LIFE INS 42,750
OFFICER'S COMPENSATION 617,500
OTHER SALARIES 380,000
UTILITIES 68,400
ADVERTISING 45,600
LEGAL AND ACCOUNTG FEES 47,500
CHARITABLE CONTRIBUTIONS 28,500
PAYROLL TAXES 59,375
INTEREST EXPENSE 199,500
BAD DEBT EXPENSE 41,591
TOTAL EXPENSES (1,834,059)
GAIN ON SALE OF EQUIPMENT 104,000
INTEREST ON MUNICIPAL BONDS 4,750
NET GAIN ON STOCK SALES 18,000
DIVIDEND INCOME 11,400
NET INCOME BEFORE INCOME TAXES 3,291,591
FEDERAL INCOME TAX EXPENSE (1,105,123)
STATE INCOME TAX EXPENSE (71,250)
NET INCOME 2,115,218
Additional Information (Schedule K):
| 1 b | Accrual |
| 2 a | 451140 |
| b | Retail sales |
| c | Musical instruments |
| 3 | No |
| 4 a | No |
| b | Yes; omit Schedule G |
| 5 a | No |
| b | No |
| 6-7 | No |
| 8 | Do not check box |
| 9 | Fill in the correct amount |
| 10 | 3 |
| 11 | Do not check box |
| 12 | Not applicable |
| 13–14 | No |
| 15a | No |
| b | Not applicable |
| 16–18 | No |
Organizational Expenditures:
The corporation incurred $11,000 of organizational expenditures on January 2, 2009. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2009 and amortize the remaining $6,000 amount over 180 months, with a full month's amortization taken for January 2009. The corporation reports this amortization in Part VI of Form 4562 and includes it in "Other Deductions" on Form 1120, Line 26.
C3-67C3-68
Capital Gains and Losses:
The corporation sold 100 shares of PDQ Corp. common stock on October 8, 2012, for $105,000. The corporation acquired the stock on December 15, 2011, for $75,000. The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2012, for $68,000. The corporation acquired this stock on September 18, 2010, for $80,000. The corporation has an $8,000 capital loss carryover from 2011.
Fixed Assets and Depreciation:
For book purposes: The corporation uses straight-line depreciation over the useful lives of assets as follows: Store building, 50 years; Equipment, 15 years (old) and ten years (new); and Trucks, five years. The corporation takes a half-year's depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements in Tables C:3-4 and C:3-5 reflect these calculations.
For tax purposes: All assets are MACRS property as follows: Store building, 39-year nonresidential real property; equipment, seven-year property; and trucks, five-year property. The corporation acquired the store building for $1.4 million and placed it in service on January 2, 2009. The corporation acquired two pieces of equipment for $320,000 (Equipment 1) and $640,000 (Equipment 2) and placed them in service on January 2, 2009. The corporation acquired the trucks for $250,000 and placed them in service on July 18, 2010. The trucks are not listed property and are not subject to the limitation on luxury automobiles. The corporation did not make the expensing election under Sec. 179 or take bonus depreciation on any property acquired before 2012. Accumulated tax depreciation through December 31, 2011, on these properties is as follows:
| Store building | $ 106,246 |
| Equipment 1 | 180,064 |
| Equipment 2 | 360,128 |
| Trucks | 130,000 |
On October 16, 2012, the corporation sold for $325,000 Equipment 1 that originally cost 320,000 on January 2, 2009. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2012, the corporation acquired and placed in service a piece of equipment costing $2 million. Assume these two transactions do not qualify as a like-kind exchange under Reg. Sec. 1.1031(k)-1(a). The new equipment is seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment but elected out of bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2012 depreciation (reproduced in Appendix C of this text).
Other Information:
- • The corporation's activities do not qualify for the U.S. production activities deduction.
- • Ignore the AMT and accumulated earnings tax.
- • The corporation received dividends (see Income Statement in Table C:3-5) from taxable, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20%.
- • The corporation paid $95,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.
- • The state income tax in Table C:3-5 is the exact amount of such taxes incurred during the year.
- • The corporation is not entitled any credits.
- • Ignore the financial statement impact of any underpayment penalties incurred on the tax return.
Required: Prepare the 2012 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules.
Optional: Prepare both Schedule M-3 (but omit Schedule B) and Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3.
| Store building | $ 106,246 |
| Equipment 1 | 180,064 |
| Equipment 2 | 360,128 |
| Trucks | 130,000 |
On October 16, 2012, the corporation sold for $325,000 Equipment 1 that originally cost 320,000 on January 2, 2009. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2012, the corporation acquired and placed in service a piece of equipment costing $2 million. Assume these two transactions do not qualify as a like-kind exchange under Reg. Sec. 1.1031(k)-1(a). The new equipment is seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment but elected out of bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2012 depreciation (reproduced in Appendix C of this text).
Other Information:
- • The corporation's activities do not qualify for the U.S. production activities deduction.
- • Ignore the AMT and accumulated earnings tax.
- • The corporation received dividends (see Income Statement in Table C:3-5) from taxable, domestic corporations, the stock of which Melodic Musical Sales, Inc. owns less than 20%.
- • The corporation paid $95,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.
- • The state income tax in Table C:3-5 is the exact amount of such taxes incurred during the year.
- • The corporation is not entitled any credits.
- • Ignore the financial statement impact of any underpayment penalties incurred on the tax return.
Required: Prepare the 2012 corporate tax return for Melodic Musical Sales, Inc. along with any necessary supporting schedules.
