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