Complete Form 1120 for Alvins Music Inc., using the information provided below. You need not complete Form 4797 for the sale of the equipment. Include the tax gain as other income on page one of Form 1120. Alvins Music Inc. (AMI) was formed in 2006 by Alvin Jones and Theona Smith. Alvin and Theona incorporated AMI on June 12, 2007.

Complete Form 1120 for Alvin’s Music Inc., using the information provided below.

You need not complete Form 4797 for the sale of the equipment. Include the tax gain as other income on page one of Form 1120.

Alvin’s Music Inc. (AMI) was formed in 2006 by Alvin Jones and Theona Smith. Alvin and Theona incorporated AMI on June 12, 2007. AMI sells all kinds of music related products including musical instruments, sheet music, CDs and DVDs. Alvin owns 60% of the outstanding common stock and Theona owns the remaining 40%.

AMI’s address is 355 Music Way, East Palo Alto CA 94303 and its EIN is 29-5748859

AMI’s business activity is retail sales of music related products.

Alvin is the CEO and President. His SSN is 123-45-6789.

Theona is the Senior VP. Her SSN is 978-65-4321.

Gwen Givens is the VP of Operations. Her SSN is 321-54-6789.

Carlson Bannister is the Secretary. His SSN is 789-12-3456.

All officers devote 100% of their time to the business. Neither Gwen nor Carlson owns any stock.

AMI uses the accrual method of accounting and a calendar year. AMI made four equal estimated tax payments of $70,000 each. Its 2013 tax liability was $165,000.

AMI paid a cash dividend of $80,000 to its shareholders on December 1.

AMI

Income Statement

For the year ending December 31, 2016

Revenue from sales	$3,420,000
Sales returns and allowances	(40,000)
Cost of goods sold	(834,000)
Gross profit from operations	$2,546,000
Dividend income (less than 20% owned)	12,000
Interest income	15,000
Capital gains	8,000
Gain from disposition of fixed assets	2,000
Gross income	$2,583,000
Expenses
Total compensation	1,300,000
Depreciation	20,000
Bad debt expense	15,000
Meals and entertainment	5,000
Maintenance	5,000
Charitable donations	27,000
Property taxes	45,000
State income taxes	60,000
Other taxes	56,000
Interest	62,000
Advertising	44,000
Professional services	32,000
Pension expenses	40,000
Supplies	6,000
Other expenses	38,000
Total expenses	1,755,000
Income before taxes	828,000
Federal income tax expense	260,000
Net income after taxes	568,000

AMI has a capital loss carryover to this year of $5,000.

Ami’s inventory purchases were $1,134,000. AMI uses FIFO.

Of the $15,000 interest, $2,500 was from a city of Fremont bond, $3,500 was from a Pleasanton city bond, $3,000 was from a US Treasury bond and $6,000 was from a money market account.

AMI sold equipment for $10,000. The original purchase price was $12,000 and accumulated depreciation was $4,000 for book and $6,000 for tax.

On July 22, 2016, AMI sold 2,500 shares of stock for $33,000. The stock had been purchased April 24, 2006 for $25,000.

Compensation paid by AMI:

Alvin $210,000

Theona $190,000

Gwen $110,000

Carlson $90,000

Other $700,000

AMI wrote off $10,000 in accounts receivable this year.

Regular tax depreciation was $31,000.

Of the $62,000 interest expense, $56,000 was from the mortgage on the building and $6,000 was from business related loans.

The pension expense was the same for book and tax.

Other expenses included $3,000 for premiums on term key person life insurance on Alvin and Theona.

	January 1, 2016	December 31, 2016
Assets
Cash	$240,000	$171,000
Accounts receivable	600,000	700,000
Allowance for doubtful accounts	(35,000)	(40,000)
Inventory	1,400,000	1,700,000
US government bonds	50,000	50,000
State and local bonds	140,000	140,000
Investments in stock	300,000	275,000
Building and equipment	1,500,000	1,600,000
Accumulated depreciation	(200,000)	(216,000)
Land	900,000	900,000
Other assets	250,000	270,000
Total assets	$5,145,000	$5,550,000
Liabilities & Equity
Accounts payable	$250,000	$220,000
Other current liabilities	125,000	120,000
Mortgages	800,000	790,000
Other liabilities	200,000	162,000
Capital stock	600,000	600,000
Retained earnings	3,170,000	3,658,000
Total liabilities & equity	$5,145,000	$5,550,000

We would expect at least pages 1-5 of Form 1120, Form 1125-A, Form 1125-E, and Schedule G.

Taxable income on page 1, line 30 should be $810,100.

Expert Answer

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