Kimberly Corp. is a calendar-year, accrual-basis corporation that commenced operations on January 1, 2011. The following adjusted accounts appear on Kimberly’s records for the year ended December 31, 2013. Kimberly is not subject to the uniform capitalization rules.

Revenues and Gains
Gross sales	$2,000,000
Dividends:
20%-owned domestic corporation	10,000
XYZ Corp.	10,000
Interest:
U.S. Treasury bonds	26,000
Municipal bonds	25,000
Insurance proceeds	40,000
Gain on sale:
Unimproved lot (1)	20,000
XYZ stock (2)	5,000
State franchise tax refund	14,000
Total	$2,150,000
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Costs and Expenses
Cost of goods sold	$ 350,000
Salaries and wages	470,000
Depreciation:
Real property	50,000
Personal property (3)	100,000
Bad debt (4)	10,000
State franchise tax	25,000
Vacation expense	10,000
Interest expense (5)	16,000
Life insurance premiums	20,000
Federal income taxes	200,000
Entertainment expense	20,000
Other expenses	29,000
Total	1,300,000
Net income	$ 850,000
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Additional Information

(1) Gain on the sale of unimproved lot -- Purchased in 2012 for use in business for $50,000; sold in 2013 for $70,000. Kimberly has never had any Sec. 1231 losses.

(2) Gain on sale of XYZ stock -- Purchased in 2012.

(3) Personal property -- The book depreciation is the same as tax depreciation for all the property that was placed in service before January 1, 2013. The book depreciation is straight line over the useful life, which is the same as class life. Company policy is to use half-year convention per books for personal property. Furniture and fixtures costing $56,000 were placed in service on January 1, 2013.

(4) Bad debt -- Represents the increase in the allowance for doubtful accounts based on an aging of accounts receivable. Actual bad debts written off were $7,000.

(5) Interest expense on

Mortgage loan	$10,000
Loan obtained to purchase municipal bonds	4,000
Line-of-credit loan	2,000

Enter in the shaded cells the amount that should be reported on Kimberly Corp.’s 2013 federal income tax return for each item below.

Reportable Item	Amount
1. What amount of interest income from the U.S. Treasury bonds is taxable?
2. Determine the tax depreciation expense under the modified accelerated cost recovery system (MACRS) for the furniture and fixtures that were placed in service on January 1, 2013. Assume that no irrevocable depreciation election is made. Round the answer to the nearest thousand. Kimberly Corp. did not use the alternative depreciation system (ADS) or a straight-line method of depreciation. No election was made to expense part of the cost of the property.
3. Determine the amount of bad debt to be included as an expense item.
4. Determine Kimberly Corp.’s net long-term capital gain.
5. What amount of interest expense is deductible?

Answer rating: 100% (QA)

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