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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-2016014. The company incorporated on December 31, 2010 and began business on January 2, 2011. Table C:3-4 contains balance sheet information at January 1, 2014, and December 31, 2014. Table C:3-5 presents an income statement for 2014. 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 15, 2014 June 15, 2014 $105,000 210,000 Although June 15 falls on a weekend, a deposit made on the next business day is considered made on the due date, June 15. Taxable income in 2013 was Sl.5 million, and the September 15, 2014 252,000 TABLE C:3-4 Melodic Musical Sales, Inc.Book Balance Sheet Information December 15, 2014 252,000 2014 Total $819,000 ACCOUNT CREDIT Jan 1,2014 Dec 31, DEBIT DEBIT CREDIT CASH 242,794 433,399 ACCOUNTS RECEIVABLE 360,000 ALLOWANCE FOR DOUBTFUL ACCOUNTS 22,500 INVENTORY 450,000 18,000 2,250,000 3,150,000 INVESTMENT IN CORPORATE STOCK 285,000 50,000 INVESTMENT IN MUNICIPAL BONDS 32,000 32,000 NET CURRENT DEFERRED TAX ASSET 12,920 7,650 CASH SURRENDER VALUE OF INS POLICY 50,000 70,000 LAND 250,000 BUILDINGS 1,500,000 250,000 1,500,000 ACCUMULATED DEPRECIATION-BUILDINGS 105,000 EQUIPMENT 75,000 1,200,000 ACCUMULATED DEPRECIATION-EQIPMENT 266,667 TRUCKS 2,400,000 200,000 200,000 200,000 ACCUMULATED DEPRECIATION-TRUCKS 100,000 60,000 ACCOUNTS PAYABLE 288,000 320,000 NOTES PAYABLE (SHORT-TERM) 480,000 600,000 ACCRUED PAYROLL TAXES 16,875 13,500 ACCRUED STATE INCOME TAXES 13,500 8,100 ACCRUED FEDERAL INCOME TAXES 110,866 - BONDS PAYABLE (LONG TERM) 2,200,000 2,200,000 NET NONCURRENT DEFERRED LIABILITY TAX 308,713 188,114 CAPITAL STOCK-COMMON 900,000 900,000 RETAIN EARNINGS-UNAPROPRIATE 3,730,928 TOTALS 8,543,049 1,800,000 6,382,714 6,382,714 8,543,049 2013 tax was $510,000. The corporation earned its 2014 taxable income evenly throughout the year. Therefore, it docs not use the annualization or seasonal methods. 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% $265,000 John Willis XXX-XX-XXXX 100% 25% 160,000 Chris Parker XXX-XX-XXXX 100% 25% 160,000 Total $585,000 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 2014, the corporation charged $36,000 to the allowance account, such amount representing actual writeoffs for 2014. C3-66C3-67 TABLE C: 3-5 Melodic Musical Sales, Inc.Book Income Statement 2012 SALES 9,000,000 RETURNS (225,000) NET SALES BEGINNING INVENTORY 8,775,000 2,250,000 PURCHASES ENDING INVENTORY 4,950,000 (3,150,000) COST OF GOODS SOLD (4,050,000) GROSS PROFIT 4,725,000 EXPENSES AMORTIZATION DEPRECIATION 0 216,667 REPAIRS 18,720 GENERAL INS. 49,500 NET PREMIUM-OFF-LIFE INS 40,500 OFFICER'S COMPENSATION 585,000 OTHER SALARIES 360,000 UTILITIES 64,800 ADVERTISING 43,200 LEGAL AND ACCOUNTG FEES 45,000 CHARITABLE CONTRIBUTIONS 27,000 PAYROLL TAXES 56,250 INTEREST EXPENSE 189,000 BAD DEBT EXPENSE 40,500 TOTAL EXPENSES GAIN ON SALE OF EQUIPMENT INTEREST ON MUNICIPAL BONDS (1,736,137) 105,000 4,500 NET GAIN ON STOCK SALES 35,000 DIVIDEND INCOME 10,800 NET INCOME BEFORE INCOME TAXES 3,144,163 FEDERAL INCOME TAX EXPENSE STATE INCOME TAX EXPENSE NET INCOME Additional Information (Schedule K): 1b Accrual 2a 451140 b Retail sales c Musical instruments 3 No 4a No b Yes; omit Schedule G 5a No b No 6-7 No 8 Do not check box 9 Fill in the correct amount (1,055,735) (67,500) 2,020,928 10 3 11 Do not check box 12 Not applicable 13-14 No 15a b No Not applicable 16-18 No Organizational Expenditures: The corporation incurred $11,000 of organizational expenditures on January 2, 2010 For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Sec. 248 to deduct $5,000 in 2011 and amortize the remaining $6,000 amount over 180 months, with a full month's amortization taken for January 2011. 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 7, 2014, for $150,000. The corporation acquired the stock on December 16, 2013, for $100,000. The corporation also sold 75 shares of JSB Corp. common stock on June 17, 2014, for $120,000. The corporation acquired this stock on September 18, 2012, for $135,000. The corporation has an $20,000 capital loss carryover from 2013. These transactions were not reported to the corporation on form 1099-B. 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 $1.5 million and placed it in service on January 2, 2011. The corporation acquired two pieces of equipment for $400,000 (Equipment 1) and $800,000 (Equipment 2) and placed them in service on January 2, 2011. The corporation acquired the trucks for $200,000 and placed them in service on July 18, 2012. 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 2014. Accumulated tax depreciation through December 31, 2013, on these properties is as follows: Store building $ 113,835 Equipment 1 225,080 Equipment 2 450,160 Trucks 104,000 On October 16, 2014, the corporation sold for $425,000 Equipment 1 that originally cost 400,000 on January 2, 2011. The corporation had no Sec. 1231 losses from prior years. In a separate transaction on October 17, 2014, the corporation acquired and placed in service a piece of equipment costing $1.6 million. Assume these two transactions do not qualify as a like-kind exchange. 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 2014 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 $90,000 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 2014 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