Melodic Musical Sales, Inc. is located at 5500 Fourth


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-2021019. The company incorporated on December 31, 2015, and began business on January 2, 2016. Table C:3-3 contains balance sheet information at January 1, 2019, and December 31, 2019. Table C:3-4 presents an unaudited GAAP income statement for 2019. These schedules are presented on a book basis. Other information follows the tables 


Table C:3-3

Medolic Musical Sales, Inc. - Book Balance Sheet Information


January 1, 2019

December 31, 2019

Account

Debit

Credit

Debit

Credit

Cash

516,774


815,494


Accounts Receivable 

400,000


500,000


Allowance for Doubtful Accounts


29,000


25,000

Inventory

2,500,000


3,500,000


Investment in Corporate Stock 

260,000


50,000


Investment in Municipal Bonds

30,000


30,000


Cash surrender value of insurance policy

60,000


80,000


Land

200,000


200,000


Buildings

2,000,000


2,000,000


Accumulated Depreciation - Buildings 


100,000


140,000

Equipment 

750,000


1,100,000


Accumulated Depreciation - Equipment 


187,500


205,000

Trucks

100,000


100,000


Accumulated Depreciation - Trucks 


30,000


50,000

Accounts Payable


300,000


270,000

Notes Payable (Short-term)


800,000


640,000

Accrued Payroll Taxes


14,880


18,600

Accrued State income taces


4,500


7,500

Accrued Federal Income Taxes


2,500


77,361

Bonds Payable (long-term)


1,800,000


600,000

Net Deferred Tax Liability 


57,394


167,593

Capital Stock - Common


1,500,000


1,500,000

Retained Earnings - Unappropriated


2,000,000


4,674,440

Totals 

6,816,774

6,816,774

8,375,494

8,375,494


Table C:3-4 

Melodic Music Sales, Inc. - Book Income Statement 2019 

Sales 


10,000,000

Returns


(250,000)

Net Sales 


9,750,000

Beginning Inventory 

2,500,000


Purchases 

5,500,000


Ending Inventory 

(3,500,000)


Cost of Goods Sold


(4,500,000)

Gross Profit


5,250,000

Expenses:



Depreciation

152,500


Repairs

20,500


General Insurance 

55,000


Net Premium - Officer’s Life Insurance 

30,000


Officers Compensation

650,000


Other Salaries

400,000


Utilities

72,000


Advertising

48,000


Legal and Accounting Fees

50,000


Charitable Contributions

30,000


Payroll Taxes

62,000


Interest Expense

210,000


Bad Debt Expense

45,000


Total Expenses


(1,825,000)

Gain on Sale of Equipment 


105,000

Interest on Municipal Bonds


5,000

Net Gain on Stock Sales


45,000

Dividend Income


12,000

Net Income before Income Taxes


3,592,000

Federal Income Tax Exp


(742,560)

State Income Tax Exp


(75,000)

Net Income 


2,774,440


Estimated Tax Payments (Form 2220):

The corporation deposited estimated tax payments as follows 

April 15, 201935,000

June 15, 2019 190,000

September 15, 2019165,000

December 15, 2019165,000

Total 555,000


Taxable income in 2018 was $1.2 million, and the 2018 tax was $252,000. The corporation earned its 2019 taxable income evenly throughout the year. Therefore, it does not use the annualization or seasonal methods. Assume the underpayment penalty rate remains at 5% for the second quarter of 2020.


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: Assume the corporation is exempt from the uniform capitalization rules (UNICAP).


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%

$290,000

John Willis

xxx-xx-xxxx

100%

25%

$180,000

Chris Parker

xxx-xx-xxxx

100%

25%

$180,000

Total




$650,000


Bad Debts

For tax purposes, the corporation uses the direct write-off method of deducting bad debts. For book purposes, the corporation useless an allowance for doubtful accounts. During 2019, the corporation charged $40,000 to the allowance account, such amount representing actual write-offs for 2019. 


Additional Information (Schedule K)

1baccrual

2a451140

2bretail sales

2cmusical instruments 

3no

4ano

4byes, omit schedule G

5ano

5bno

6-7no

8do not check box

9fill in the correct amount

103

11do not check box

12not applicable

13-14no

15ano

15bdo not check box

16-23no

24no

25no


Organizational Expenditures

The corporation incurred less than $5,000 of org expenditures in the year it began business. For book purposes, the corporation expensed the entire expenditure. For tax purposes, the corporation elected under Section 248 to deduct the entire amount of expenditures in the year it began business. Therefore, no amortization expenditures appear in the tax return or book financial statements for the current year. 


Capital Gains and Losses

The corporation sold 100 shares of PDQ Corp. common stock on October 8, 2019, for $145,000. The corporation acquired the stock on December 14, 2018, for $90,000. The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2019, for $110,000. The corporation acquired this stock on September 18, 2017, for $120,000. The corporation has a $15,000 capital loss carryover from 2018. 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 building50 years 

Equipment10 years 

Trucks5 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 the tables reflect these calculations. 

For Tax Purposes: all assets are MACRS property as follows:

Store building39-year nonresidential real property 

Equipment 7-year property

Trucks5-year property 

The corporation acquired the store building for $2 million and placed it in service on January 2, 2016. The corporation acquired two pieces of equipment for $250,000 (equipment 1) and $500,000 (equipment 2) and placed them into service on January 2, 2016. The corporation acquired the trucks for $100,000 and placed them into service on July 18, 2017. The trucks are not listed property and are not subject to the limitations on luxury automobiles. 


The corporation did not make the expensing election under Section 179 or take bonus depreciation on any property acquired before 2019. Accumulated tax depreciation through December 31, 2018, on these properties, is as follows:

Store building$151,780

Equipment 1$140,675

Equipment 2$281,350

Trucks$52,000


On October 16, 2019, the corporation sold for $280,000 Equipment 1 that originally cost $250,000 on January 2, 2016. The corporation has no Section 1231 losses from prior years. In a separate transaction on October 17, 2019, the corporation acquired and placed in service a piece of equipment costing $600,000. Assume these two transactions do not qualify as a like-kind exchange. The new equipment is 7-year property. The corporation made the Section 179 expensing election with regard to the new equipment for the entire cost of this property. Where applicable, use published IRS depreciation tables to compute 2019 depreciation. 


Other Information

  • Ignore the accumulated earnings tax 

  • The corporation received dividends (see income statement in table C3-4) from taxable, domestic corporations, the stock of which Melodic owns less than 20%

  • The corporation paid $100,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings 

  • The state income tax in table C3-4 is the exact amount of such taxes incurred during the year 

  • The corporation is not entitled to any credits 

  • Ignore the financial statement impact of any underpayment penalties incurred on the tax return 


Required

Prepare the 2019 corporate tax return for melodic along with any necessary supporting schedules 


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