(Solved by Humans)-Problem C: 3-64 Ac€?o The Corporate Income Tax Textbook: Prentice HallAc€?cs Federal Taxation

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Problem C: 3-64 Ac€?o The Corporate Income Tax Textbook: Prentice HallAc€?cs Federal Taxation 2011, Kenneth E. Anderson, Thomas R. Pope, and John Kramer Knoxville Musical Sales, Inc. is located at 5500 Kingston Pike, Knoxville, TN 37919. 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 75-2011009. The company incorporated on December 31, 2005, and began business on January 2, 2006. Table C:3-3 contains balance sheet information at January 1, 2009, and December 31, 2009. Table C:3-4 presents an income statement for 2009. These schedules are presented on a book basis. Other information follows. Estimated Tax Payments (Form 2220): The corporation deposited estimated tax payments as follows: April 15, 2009 $ 97,000 June 15, 2009 196,000 September 15, 2009 233,000 December 15, 2009 233,000 Total $759,000 Taxable income in 2008 was $1,500,000, and the 2008 tax was $510,000. The corporation earned its 2009 taxable income evenly throughout the year. Therefore, it does not usethe annualization or seasonal methods. Inventory and Cost of Goods Sold (Schedule 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 in Schedule 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. Knoxville Musical Sales, Inc.Ac€??Book Balance Sheet Information January 9, 2009 December 31, 2009 Debit Credit Debit Credit Cash $ 339,544 $ 427,967 Accounts receivable 394,740 459,000 Allowance for doubtful accounts $ 33,553 $ 39,015 Inventory 2,125,000 2,975,000 Investment in corporate stock 190,000 85,000 Investment in municipal bonds 20,000 20,000 Cash surrender value of insurance policy 25,000 35,000 Buildings 1,000,000 1,000,000 Accumulated depreciationAc€??Buildings 50,000 70,000 Equipment 900,000 1,450,000 Accumulated depreciationAc€??Equipment 150,000 182,500 Trucks 200,000 200,000 Accumulated depreciationAc€??Trucks 60,000 100,000 Land 400,000 400,000 Deferred tax asset 14,618 13,714 Accounts payable 300,000 270,000 Notes payable (short-term) 500,000 400,000 Accrued payroll taxes 12,750 15,938 Accrued state income taxes 7,650 12,750 Accrued federal income taxes 103,023 Bonds payable (long-term) 1,800,000 1,200,000 Deferred tax liability 144,949 285,802 Capital stockAc€??Common 850,000 850,000 Retain earningsAc€??Unappropriated 1,700,000 3,536,653 Totals $5,608,902 $5,608,902 $7,065,681 $7,065,681 Line 9 (a) Check (ii) (b), (c) & (d) Not applicable (e) & (f) No Compensation of Officers (Schedule E): (a) (b) (c) (d) (f) Mary Travis 345-82-7091 100% 50% $252,500 John Willis 783-97-9105 100% 25% 150,000 Chris Parker 465-34-2245 100% 25% 150,000 Total $552,500 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 2009, the corporation charged $34,000 to the allowance account, such amount representing actual writeoffs for 2009. Additional Information (Schedule K): 1 b Accrual 6-7 No 2 a 451140 8 Do not check box B Retail sales 9 Fill in the correct amount C Musical instruments 10 3 3 No 11 Do not check box 4 a No 12 Not applicable B Yes; omit Schedule G 13 No 5 a No B No Knoxville Musical Sales, Inc.Ac€??Book Income Statement 2009 Sales $ 8,500,000 Returns (212,500) Net sales $ 8,287,500 Beginning inventory $2,125,000 Purchases 4,675,000 Ending inventory (2,975,000) Cost of goods sold (3,825,000) Gross profit $ 4,462,500 Expenses: Amortization $ Ac€?o0Ac€?o Depreciation 152,500 Repairs 17,680 General insurance 46,750 Net premium-OfficersAc€?c life insurance 38,250 OfficerAc€?cs compensation 552,500 Other salaries 340,000 Utilities 61,200 Advertising 40,800 Legal and accounting fees 42,500 Charitable contributions 25,500 Payroll tax 53,125 Interest expense 178,500 Bad debt expense 39,462 Total expenses (1,588,767) Gain on sale of equipment 85,000 Interest on municipal bonds 4,250 Dividend income 10,200 Net gain on stock sales 16,000 Net income before income taxes $ 2,989,183 Federal income tax expense (1,003,780) State income tax expense (63,750) Net income $ 1,921,653 Organizational Expenditures: The corporation incurred $6,800 of organizational expenditures on January 2, 2006. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2006 and amortize the remaining $1,800 amount over 180 months, with a full monthAc€?cs amortization taken for January 2006. The corporation reports this amortization in Part VI of Form 4562 and includes it in Ac€A?Other DeductionsAc€?? on Form 1120, Line 26 Capital Gains and Losses: The corporation sold 100 shares of PDQ Corp. common stock on March 7, 2009, for $75,000. The corporation acquired the stock on December 15, 2008, for $45,000. The corporation also sold 75 shares of JSB Corp. common stock on June 17, 2009, for $46,000. The corporation acquired this stock on September 18, 2006, for $60,000. The corporation has an $8,000 capital loss carryover from 2008. 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-yearAc€?cs depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements in Tables C:3-3 and C:3-4 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 million and placed it in service on January 2, 2006. The corporation acquired two pieces of equipment for $300,000 (Equipment 1) and $600,000 (Equipment 2) and placed them in service on January 2, 2006. The corporation acquired the trucks for $200,000 and placed them in service on July 18, 2007. The corporation did not make the expensing election under Sec. 179 on any property acquired before 2009. Accumulated tax depreciation through December 31, 2008, on these properties is as follows: Store building $ 75,890 Equipment 1 168,810 Equipment 2 337,620 Trucks 104,000 On November 16, 2009, the corporation sold for $325,000 Equipment 1 that originally cost $300,000 on January 2, 2006. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on November 17, 2009, the corporation acquired and placed in service a piece of equipment costing $850,000. 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 and claimed bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2009 depreciation (reproduced in Appendix C of this text). Other Information: Ac€?c The corporationAc€?cs activities do not qualify for the U.S. production activities deduction. Ac€?c Ignore the AMT and accumulated earnings tax. Ac€?c The corporation received dividends (see Income Statement in Table C:3-4) from taxable, domestic corporations, the stock of which Knoxville Musical Sales, Inc. owns less than 20%. Ac€?c The corporation paid $85,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings. Ac€?c The state income tax in Table C: 3-4 is the exact amount Ac€?c The state income tax in Table C:3-4 is the exact amount of such taxes incurred during the year. Ac€?c The corporation is not entitled any credits. Required: Prepare the 2009 corporate tax return for Knoxville Musical Sales, Inc. along with any necessary supporting schedules. Optional: Prepare Schedule M-3 (and Schedule B) as well as Schedule M-1 even though the IRS does not require both Schedule M-1 and Schedule M-3. Note to Instructor: See solution in the InstructorAc€?cs Guide for other optional information to provide to students.