On December 31, 2018, Jeff, John and James formed J3 Manufacturing Corp, a corporation created under the
Question:
On December 31, 2018, Jeff, John and James formed J3 Manufacturing Corp, a corporation created under the laws of the State of New York, for the principle purpose of manufacturing and distributing custom designed bikes. The company is authorized to issue 1000 shares of $1.00 par value common stock. Jeff, John, and James contributed the following property and each received 250 shares of $1.00 par value common stock. Jeff, John, and James elected themselves as officers of the J3 Mfg Corp and each received a salary of $150,000 for the tax year ending December 31, 2019.
1. Jeff FMV Adj. Basis
* Building $2,000,000 $1,250,000
* Land 325,000 250,000
*Mortgage (Debt) 530,000 530,000
2. John
* Inventory 750,000 500,000
* Account Receivables 855,000 600,000
* Accounts Payable 125,000 125,000
* NYS Muni Bonds (4.5%, 06/30/2024) 315,000 300,000
3. James
* Cash 795,000 795,000
* 36,500 shares JPM Chase (acq. 01/01/18) 1,000,000 460,000
The company adopted a calendar year and is an accrual basis taxpayer. For the tax year ending December 31, 2019, the company had the following activity:
► Sales $ 10,250,000
► Inventory purchases 3,225,000
► Ending Inventory 845,000
► Dividend income from a 1% owned Company 150,000
► Interest on investments 12,700
► Interest Income – Money Market 4,500
► Officer’s compensation 450,000
► Supplies 82,000
► Telephone expense 22,600
► Meals and Entertainment 26,500
► Employee salaries 700,000
► Marketing 195,000
► Travel 150,000
► Utilities 35,000
► Insurance 29,800
► Repairs & Maintenance 16,500
► Interest Expense 65,000
► Employment benefits 82,000
► Payroll taxes 53,550
► Employee bonus accrual paid 3/16/2020 300,000
Officer’s Life Insurance 65,000
► Purchased New Truck 125,500
► Purchased New Equipment 275,000
► Made improvements to building 400,000
► Contribution to Cancer Research Foundation 200,000
► Recorded a reserve for Bad Debts 125,000
► Bad debt right-off 75,000
► Book Depreciation:
* Building 12,190
* Equipment 86,000
* Truck 21,000
* Improvements 10,000
► Federal Income Tax (accrued) 175,700
► State Income Tax (accrued) 105,000
► Book Income ??
► Paid distribution to each shareholders on 12/15/2019 150,000
Miscellaneous: The company elected to take the maximum $179 on the new equipment. The three officers devote 100% of their time to the business. [EIN: 22-3658908]. The bonus accrual is not included in employee salaries. The stock in JP Morgan represents less than 1% of JP’s outstanding stock.
a. Prepare the 2019 corporate tax income return for J3 Manufacturing Corporation.
b. Calculate earnings & profits and determine tax effect of distribution to shareholders. Assume E&P depreciation is the same as book depreciation.
c. Prepare an excel worksheet showing J3’s basis in assets contributed at December 31, 2018.
d. Prepare an excel worksheet showing shareholder’s basis in stock at December 31, 2018, and December 31, 2019.
e. What would be the effect if the mortgage transferred to J3 by Jeff had been taken on the building on June 30, 2018, and Jeff used the money to buy and new car for personal use and personal residence?
Intermediate Accounting
ISBN: 978-0078025839
9th edition
Authors: J. David Spiceland, James Sepe , Mark Nelson , Wayne Thomas