Liberty University Corporate Tax Return Problems

Description

Required:Complete Alvin’s Music Inc.’s (AMI) 2021 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.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.Forms 1125-A and 1125-E are not required.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:Alvin’s Music Inc. (AMI) was formed in 2011 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their store on June 12, 2012. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDs. Alvin owns 60 percent of the outstanding common stock of AMI and Theona owns the remaining 40 percent.AMI is located at 355 Music Way, East Palo Alto, California 94303.AMI’s Employer Identification Number is 29-5748859.AMI’s business activity is retail sales of music-related products. Its business activity code is 451140.Officers of the corporation are as follows:Alvin Jones is the chief executive officer and president with total compensation of $250,000 (Social Security number 123-45-6789).Theona Smith is the executive vice president with compensation of $150,000 (Social Security number 978-65-4321).Gwen Givens is the vice president over operations with compensation of $120,000.Carlson Bannister is the secretary with compensation of $80,000.All officers devote 100 percent of their time to the business and all officers are U.S. citizens.Neither Gwen nor Carlson owns any stock in AMI.AMI uses the accrual method of accounting and has a calendar year-end.AMI made payments that require Form 1099s, and will file the Form 1099s before the tax return is filed.AMI 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, AMI would like to receive a refund.AMI paid a dividend of $80,000 to its shareholders on December 1. AMI had sufficient earnings and profits (E&P) to cover the distribution.The following is AMI’s audited income statement for 2021:The following is AMI’s audited income statement for 2021:AMI Income StatementFor year ending December 31, 2021Revenue from sales$ 3,420,000 Sales returns and allowances(40,000)Cost of goods sold (839,500)Gross profit from operations$ 2,540,500 Other income:Capital gains$ 8,000 Gain from disposition of fixed assets2,000 Dividend income12,000 Interest income 15,000 Gross income$2,577,500 Expenses:Compensation$(1,300,000)Depreciation(20,000)Bad debt expense(15,000)Meals (fully deductible)(2,500)Maintenance(7,000)Charitable donations(27,000)Property taxes(45,000)State income taxes(60,000)Other taxes(56,000)Interest(67,500)Advertising(44,000)Professional services(32,000)Pension expense(40,000)Supplies(6,000)Other expenses (35,000)Total expenses (1,751,500)Income before taxes826,000 Federal income tax expense (260,000)Net income after taxes$ 568,500 Notes:AMI has a capital loss carryover to this year from last year in the amount of $5,000.AMI’s inventory-related purchases during the year were $1,134,000. AMI values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §263A do not apply to AMI.Of the $15,000 interest income, $2,500 was from a City of Fremont bond issued in 2018, $3,500 was from a Pleasanton city bond issued in 2019, $3,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.AMI 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 $6,000 of tax depreciation. For tax purposes, the entire gain was recaptured as ordinary income under §1245.AMI’s dividend income came from Simon’s Sheet Music. AMI owned 15,000 shares of the stock in Simon’s Sheet Music (SSM) at the beginning of the year. This represented 15 percent of the SSM outstanding stock.On July 22, 2021, AMI sold 2,500 shares of its Simon’s Sheet Music stock for $33,000. It had originally purchased these shares on April 24, 2016, for $25,000. After the sale, AMI owned 12.5 percent of Simon’s Sheet Music.AMI’s compensation is as follows:Officers, $600,000Other, $700,000AMI wrote off $10,000 in accounts receivable as uncollectible during the year.Tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A.Of the $62,000 of interest expense, $56,000 was from the mortgage on AMI’s building and the remaining $6,000 of interest was from business-related loans.The pension expense is the same for both book and tax purposes.Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona.The following are AMI’s audited balance sheets as of December 31, 2020 and December 31, 2021.AMI, Inc. Balance Sheet
as of December 31, 202112/31/202012/31/2021AssetsCash$ 240,000 $ 169,000 Accounts receivable600,000 700,000 Allowance for doubtful accounts(35,000)(40,000)Inventory1,400,000 1,700,000 U.S. government bonds50,000 50,000 State and local bonds140,000 140,000 Investments in stock300,000 275,000 Building and other depreciable assets1,500,000 1,600,000 Accumulated depreciation(200,000)(216,000)Land900,000 900,000 Other assets 250,000 270,000 Total assets$5,145,000 $5,548,000 Liabilities and Shareholders’ EquityAccounts payable$ 250,000 $ 220,000 Other current liabilities125,000 117,500 Mortgage800,000 790,000 Other liabilities200,000 162,000 Capital stock600,000 600,000 Retained earnings 3,170,000 3,658,500 Total liabilities and shareholders’ equity$5,145,000 $5,548,000

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Tax Return Problems – formerly Appendix C
Corporate Tax Return Problem 1
Required:
Complete Alvin’s Music Inc.’s (AMI) 2021 Form 1120, Schedule D, and Schedule G (if
applicable) using the information provided below.
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.
Forms 1125-A and 1125-E are not required.
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:
Alvin’s Music Inc. (AMI) was formed in 2011 by Alvin Jones and Theona Smith. Alvin and
Theona officially incorporated their store on June 12, 2012. AMI sells (retail) all kinds of musicrelated products including musical instruments, sheet music, CDs, and DVDs. Alvin owns 60
percent of the outstanding common stock of AMI and Theona owns the remaining 40 percent.
•
•
•
•
•
•
•
AMI is located at 355 Music Way, East Palo Alto, California 94303.
AMI’s Employer Identification Number is 29-5748859.
AMI’s business activity is retail sales of music-related products. Its business activity code
is 451140.
Officers of the corporation are as follows:
o Alvin Jones is the chief executive officer and president with total compensation of
$250,000 (Social Security number 123-45-6789).
o Theona Smith is the executive vice president with compensation of $150,000
(Social Security number 978-65-4321).
o Gwen Givens is the vice president over operations with compensation of
$120,000.
o Carlson Bannister is the secretary with compensation of $80,000.
All officers devote 100 percent of their time to the business and all officers are U.S.
citizens.
Neither Gwen nor Carlson owns any stock in AMI.
AMI uses the accrual method of accounting and has a calendar year-end.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
•
•
•
AMI made payments that require Form 1099s, and will file the Form 1099s before the tax
return is filed.
AMI 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, AMI would like to receive a
refund.
AMI paid a dividend of $80,000 to its shareholders on December 1. AMI had sufficient
earnings and profits (E&P) to cover the distribution.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
The following is AMI’s audited income statement for 2021:
AMI Income Statement
For year ending December 31, 2021
Revenue from sales
$ 3,420,000
Sales returns and allowances
(40,000)
Cost of goods sold
(839,500)
Gross profit from operations
$ 2,540,500
Other income:
Capital gains
$
8,000
Gain from disposition of fixed assets
2,000
Dividend income
12,000
Interest income
15,000
Gross income
$2,577,500
Expenses:
Compensation
$(1,300,000)
Depreciation
(20,000)
Bad debt expense
(15,000)
Meals (fully deductible)
(2,500)
Maintenance
(7,000)
Charitable donations
(27,000)
Property taxes
(45,000)
State income taxes
(60,000)
Other taxes
(56,000)
Interest
(67,500)
Advertising
(44,000)
Professional services
(32,000)
Pension expense
(40,000)
Supplies
(6,000)
Other expenses
(35,000)
Total expenses
(1,751,500)
Income before taxes
826,000
Federal income tax expense
(260,000)
Net income after taxes
$ 568,500
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Notes:
1. AMI has a capital loss carryover to this year from last year in the amount of $5,000.
2. AMI’s inventory-related purchases during the year were $1,134,000. AMI values its
inventory based on cost using the FIFO inventory cost flow method. Assume the rules of
§263A do not apply to AMI.
3. Of the $15,000 interest income, $2,500 was from a City of Fremont bond issued in 2018,
$3,500 was from a Pleasanton city bond issued in 2019, $3,000 was from a U.S. Treasury
bond, and the remaining $6,000 was from a money market account.
4. AMI 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 $6,000 of tax depreciation. For tax
purposes, the entire gain was recaptured as ordinary income under §1245.
5. AMI’s dividend income came from Simon’s Sheet Music. AMI owned 15,000 shares of
the stock in Simon’s Sheet Music (SSM) at the beginning of the year. This represented 15
percent of the SSM outstanding stock.
6. On July 22, 2021, AMI sold 2,500 shares of its Simon’s Sheet Music stock for $33,000. It
had originally purchased these shares on April 24, 2016, for $25,000. After the sale, AMI
owned 12.5 percent of Simon’s Sheet Music.
7. AMI’s compensation is as follows:
•
•
Officers, $600,000
Other, $700,000
8. AMI 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 AMI’s 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 AMI is the beneficiary. The policies cover the lives of Alvin and Theona.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
The following are AMI’s audited balance sheets as of December 31, 2020 and December 31,
2021.
AMI, Inc. Balance Sheet
as of December 31, 2021
12/31/2020
Assets
Cash
Accounts receivable
Allowance for doubtful accounts
Inventory
U.S. government bonds
State and local bonds
Investments in stock
Building and other depreciable assets
Accumulated depreciation
Land
Other assets
Total assets
Liabilities and Shareholders’ Equity
Accounts payable
Other current liabilities
Mortgage
Other liabilities
Capital stock
Retained earnings
Total liabilities and shareholders’ equity
12/31/2021
$ 240,000 $ 169,000
600,000
700,000
(35,000)
(40,000)
1,400,000
1,700,000
50,000
50,000
140,000
140,000
300,000
275,000
1,500,000
1,600,000
(200,000)
(216,000)
900,000
900,000
250,000
270,000
$5,145,000 $5,548,000
$ 250,000
125,000
800,000
200,000
600,000
3,170,000
$5,145,000
$ 220,000
117,500
790,000
162,000
600,000
3,658,500
$5,548,000
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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