Acct6113- S Corporation Tax Problem Solution

Acct6113- S Corporation Tax Problem Solution

Question
	
Acct 6113
S Corporation
This problem is worth 100 points
• Prepare Form 1120 S return for Douglas Plastics Co
• Prepare work papers reconciling book income to taxable income. You can accomplish this by creating trial balance and adjusted journal entries.
• Explain you answers. Do not write long essays. Show your calculations and provide your conclusion in a succinct format
• Attach appropriate Tax Forms
• Please work individually
• If you have an access, you may use tax return preparation software.
• Return is for 2013 tax year.
FORM 1120S – U.S. INCOME TAX RETURN FOR AN S CORPORATION
On March 12, 1992, Douglas Plastics Co., which is located at 2400 Lakeview Street, Fargo, North Dakota, 58103, (312) 555-8697, fi led an election under Code Sec. 1362(a) to be treated as an S corporation.
Douglas Plastics Co. was incorporated January 1, 1992, under the laws of the State of North Dakota. It is engaged in the manufacture of plastic products, principally toys (principal business activity code number 326100). All of its income is from sources within the United States. Its employer identification number is 31-0031258.
In 2013, the corporation had two equal stockholders and each devoted 100% of their time to the business. There were no changes in stock ownership during 2013, and each stockholder owned 1250 shares of the corporation. One of these stockholders, Douglas Pratt, served as president. He resides at 660 Springsteen Street, Fargo, North Dakota 58103. His social security number is 555-11-6789. The other stockholder, Rickie L. Jones, served as vice president. He resides at 425 State Street, Fargo, North Dakota, 58103. His social security number is 555-33-9876. In 2013, Mr. Pratt’s compensation was $50,000 and Mr. Jones’ compensation was $46,000.
The corporation hired the outside firm of ATOZ Accounting Services (EIN 21-7777777) located at 1120 Main Street in Waytogo, North Dakota, 58103, (701) 555-1120, to prepare its income tax return on the accrual basis. Dewey Fugim prepared the return. Mr. Fugim (Preparer Tax Identification Number P12345678) is new to the firm and Mr. Pratt is uncomfortable with him discussing the tax return with the IRS without his knowledge and decides not to give him tax return preparer permission.
Form 4562
On January 3, 2012, Douglas acquired molds and patterns at a cost of $12,000. The molds and patterns are three-year MACRS property depreciated using the 200% declining balance method and a half-year convention. Bonus depreciation was not claimed because the assets are used. No Code Sec. 179 expense deduction was taken. The 2013 depreciation deduction on the molds and patterns amounts to $5,333. A $4,000 depreciation deduction was claimed in 2012.
On June 18, 2011, used but reconditioned seven-year MACRS machinery was acquired at a cost of $138,500. Douglas elected to depreciate the machinery using the alternative depreciation method with an 11-year recovery period. No bonus depreciation was claimed and no Code Sec. 179 expense was elected for this property. The 2013 depreciation deduction on the machinery is $12,591. Accumulated depreciation at the beginning of 2013 is $18,892.
On February 11, 2013, Douglas acquired seven-year MACRS office furniture and fixtures at a cost of $4,000. Douglas elects to expense the entire amount under Code Sec. 179.
On January 2, 1995, Douglas acquired a brick storage building at a cost of $110,000. The building is depreciated using the straight-line method over a 31½ year life. The 2013 depreciation deduction on the building amounts to $3,492. Accumulated depreciation at the beginning of 2013 is $55,729.
Form 4797
On January 30, 2013, Douglas sold machinery for $3,500. The machinery, which is 7-year MACRS property, was purchased on January 14, 2007 for $10,000 and depreciated using the 200-percent declining-balance method and a half-year convention. Accumulated depreciation was $7,323 on the date of sale.
On January 18, 2013, Douglas sold a building for $62,500. The building was acquired on January 10, 1995, at a cost of $90,000. Douglas has accumulated depreciation on the building of $45,597 at the beginning of 2013. Also, on January 18, 2013, the corporation sold the land associated with the building for $13,000. The land was acquired at a cost of $10,000.
Charitable Contributions
The following charitable contributions to 50% organizations located in Fargo, North Dakota were made by the corporation in 2013.
Community Fund, $500;
Mercy Hospital, $500;
Congregational Church, $250; and
Boy Scouts of America, $250.
Distributions
The corporation made cash distributions of $80,000 on March 12, 2013, and $120,000 on May 5, 2013. The distributions were in proportion to stock holdings.
From 1120S – Schedule D
The corporation sold 100 shares of Nicole Co. stock on January 16, 2013, for $7,775. The stock was purchased on March 12, 1995, for $9,689.
ADJUSTED TRIAL BALANCE
The following is the adjusted trial balance of Douglas Plastics Co. as of December 31, 2013:
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Postage
Debit
Credit
Gross Sales
692,759.00
Return & Allowances
7,360.00
Inventory Adjustment (1)
6,565.00
Purchases
100,650.00
Factory Sales & Wages
180,235.00
Freight Expense
950.00
Factory Insurance
4,200.00
Factory Utilities
10,850.00
Factory Water (Form 1125A Other Costs)
1,150.00
Factory Payroll Taxes?
16,110.00
Factory Real Estate Taxes?
5,000.00
Dividends Received Domestic (2)
788.00
Interest On US Obligations (2)
2,990.00
Interest on Tax Exempt Bonds
1,635.00
Expense Related to Tax Exempt Bonds
90.00
Other Interest (2)
472.00
Gross Rents (3)
4,000.00
Loss on Sale of Stock (4)
1,914.00
Gain on Sale of Building (4)
18,216.00
Gain on Sale of Land (4)
3,000.00
Gain on Sale of Machine (4)
823.00
Bad Debts
4,500.00
Rents Paid
1,200.00
Motor Vehicle Tax
100.00
Employment Taxes
11,157.00
Franchise Tax
300.00
Real Property Tax
1,680.00
Charitable Contributions
1,500.00
Employee Health Insurance Costs
34,000.00
Depreciation
25,982.00
4,683.00
Office Supplies
3,760.00
Telephone
4,630.00
Meals & Entertainment (subject to 50% Limitation)
6,600.00
Debit
Credit
Shareholder Distribution 3/12/11
80,000.00
Shareholder Distribution 5/5/11
120,000.00
Officer Salaries
96,000.00
Salaries & Wages of Marketing & Administration
39,446.00
Repairs
3,694.00
Interest Paid
13,620.00
Advertising
3,500.00
Pension Plan Contributions
8,805.00
Cash
60,662.00
Closing Inventory
125,330.00
Notes & Accounts Receivable
19,210.00
Prepaid Insurance
300.00
North Dakota Municipal Bonds
30,000.00
US Series EE Bonds
24,450.00
100S Nicole Co Common Stock
9,700.00
Brick Storage Bldg (Acquired 1/2/95)
110,000.00
Factory Equipment (Acquired 6/18/09)
138,500.00
Molds and Patterns (Acquired 1/3/10)
12,000.00
Furniture and Fixtures (Acquired 2/11/11)
4,000.00
Accumulated Depreciation
104,037.00
Land
20,000.00
Accounts Payable
90,749.00
Short Term Notes Payable to Banks
10,000.00
Accrued Payroll Taxes
4,410.00
Long Term Notes Payable
210,000.00
Capital Stock
5,000.00
Accumulated Adjustments Account (1/1/12) (5)
190,734.00
Other Adjustment Account (1/1/12)(5)
1,640.00
Total
1,347,818.00
1,347,818.00
1 Inventory adjustment: The inventory adjustment figure represents the difference between the opening inventory and the closing inventory. This figure, as such, will not appear on the return. The inventories are taken at cost or market, whichever is lower. There was no change in determining the quantities, cost or valuations between the opening and closing inventory.
2 Dividends received; U.S. obligations interest; Other interest: The Nicole Co. dividend income of $788, the interest earned on the U.S. Series EE Bonds of $2,990, and the other interest of $472 from Fargo National Bank, is portfolio income. As such, these items are reported on Schedules K and K-1.
3 Gross rents: The gross rents of $4,000 represent gross income from a rental activity other than real estate and are reported on Schedules K and K-1. There were no related expenses.
4 Stock sale loss; Building sale gain; Land sale gain; Machine sale gain: For purposes of reporting these items on Form 1120S, it is necessary to first report each of them either on Schedule D or on Form 4797, as applicable. The capital loss and any Code Sec. 1231 gain are reported on Schedules K and K-1.
5 Accumulated adjustments account; Other adjustments account: The amount of the “Retained earnings” as reported on Line 24, column (b) of Schedule L is the sum of the Accumulated Adjustments account and the Other Adjustments account at the beginning of 2013. Schedule M-2 must be completed to determine the amount reported on Line 24, column (d) of Schedule L.
The following is a balance sheet for Douglas Plastics Co. as of December 31, 2012:
Assets
Dr
Cr
Cash
50,706.00
Notes and Accounts Receivable
94,210.00
Inventories
118,765.00
Prepaid Insurance
530.00
US Series E Bonds
10,368.00
North Dakota Municipal Bonds
30,000.00
Loans to Shareholders
2,000.00
200 Shares Nicole Common
19,389.00
Buildings & Other Depreciable Assets
360,500.00
Accumulated Depreciation
131,094.00
Land
30,000.00
Liabilities & Capital
Accounts Payable
155,905.00
Short Term Notes Payable To Banks
20,000.00
Accrued Payroll Taxes
2,095.00
Long Term Notes
210,000.00
Capital Stock
5,000.00
Accumulated Adjustments Account
190,734.00
Other Adjustment Account
1,640
Total
716,478.00
716,478
Douglas Plastics Co. filed all other necessary information and tax returns for 2013, including Form 1096 and Form 1099.