The Snap-It-Open Corporation incorporated and began operations in January 15 of the current year. Its address isXXXXX Baltimore, MD 23239. Its employer identification number is XXXXX The corporation elects to file its initial tax return as a calendar-year corporation and uses the accrual method of accounting. It elects the FIFO method of inventory valuation. Jason Sprull, SSN XXX-XX-XXXX, and Martin Winwsock, SSN XXX-XX-XXXX, formed the business. They each contributed $250,000 cash for 50 percent of the 160,000 shares of $1 par value stock issued and outstanding. The company is formed to assemble and market a unique, compact, snap-open umbrella, and its business activity code is 339900. These umbrellas are sold to multiple organizations as premiums. The company purchases the umbrella frames and several types of waterproof fabric for the umbrella material and covers from various manufacturers. It prints the organizations’ advertising logos or other designs on the umbrella material and covers. It then assembles these on the umbrella frames for delivery to the customer, along with the covers. On January 16, the company installed two new machines for printing and cutting the fabric for the umbrellas that it had purchased for $250,000 each and two used umbrella assembly machines that it had purchased for $200,000 each. The company obtained a bank loan of $750,000 secured by the machines. Jason and Martin were required to personally guarantee this loan with an 8 percent annual interest rate on the unpaid balance. The first principal payment of $160,000 is not due until January 16 of the next year. During the year, the company purchased $150,000 of fabric and $210,000 of umbrella frames. It returned one order of frames valued at $5,000 because of a defect in the snap-open mechanism and received a cash refund for that amount. Both Jason and Martin worked full-time in the business. Jason was the salesperson for the company, and Martin managed the office and printing and assembly operations. Each received a salary of $60,000 for the year. They had six employees with the following incomes for the year: $45,000 for an accountant; $21,000 for a receptionist; $28,000 for each of two print machine operators; and $25,000 for each of two assembly machine operators. There are no accrued salaries or taxes as of the end of the current year. FUTA taxes are assessed on the first $7,000 of wages at a rate of 6.2 percent. During the year, the company attained the umbrella sales worth $1,535,000 and collected $1,180,000 on these sales. It also paid the following expenses in cash: Rent $240,000 Repairs and Maintenance $20,000 Utilities $80,000 Taxes and Licenses – excluding FICA and FUTA Tax $10,000 Health Insurance $16,000 Advertising $40,000 Travel – excluding meals $20,000 Meals and Entertainment $15,000 Group and Term Life Insurance $2,000 As an accrual-basis taxpayer, the company recognized $57,500 in the interest expense on the note, $750,000 x 0.08 x 11.5/12, and established an allowance account for bad debts equal to 2 percent of sales. They recognized the depreciation expense for financial accounting equal to 10 percent of the purchase price for the new printing machines and 12.5 percent of the purchase price for the used assembly machines. Their inventory at the year-end consisted of $15,000 of fabric and $18,000 of umbrella frames, based on the FIFO inventory method. For ease, you are required only to allocate the factory salaries to the calculation of cost of sold goods. The company made estimated tax payments worth $40,000 for the year. Required: Part a. Prepare a financial accounting income statement (before income tax) and balance sheet for Snap-It-open Corporation for the current year. (Do not forget to compute FICA and FUTA taxes for all employees.) Part b. Complete a form 1120 and form 4562 for Snap-it Open Corporation using the following additional information. The Corporation wrote off no bad debts for the year and it maximized its cost recovery deductions on the four machines purchased
Snap-it-open Appendix C – Corporate Tax Return Problem Journal Entries and Checkfigures (use 2014 forms) Journal Entries: You will need to calculate Depreciation and Bad Debt Expense. Below are the payroll and deferred tax journal entries you will need to make to the financial statements. Assume there are no state income taxes.
Payroll Tax Expense 25,698 FICA Payable 292k *.0765 22,338 FUTA Payable 8*7k*.06 3,360 To record payroll taxes expense FICA Payable 22,338 FUTA Payable 3,360 Cash 25,698 To record payment of payroll taxes Deferred Tax Asset 13,158 Tax Expense 191,625 Deferred Tax Liability 204,783 Adjusting Journal Entry for Deferred Tax items (refer to Sch M temporary differences and multiply them by 34% tax rate to calculate the amounts). The above entries are needed as they impact corporate returns but learning of these rules are covered in more detail in the payroll tax class or in financial accounting classes. You also have other journal entries that are typical of introductory accounting classes and you will need to make those journal entries. As you read the information in the problem, you will notice there were other transactions during the year and you need to make these journal entries too. I suggest you use T accounts as there are a lot of transactions that impact cash and it is important to keep track of the balances. Forms you need to complete (use 2014 Forms) Form 1120 – 5 pages Schedule G – 1 page Form 1125-A – 1 page Form 1125-E – 1 page Form 4562 – 1 page (do not complete Form 8903 – 1 page)
Checkfigures: Here are a couple of checkfigures. I’ve given you some actual numbers and for others I’ve given you partial answers. Hopefully this is a good check for you as you complete the project. Form 1120 – Page 1 (Taxable Income) Line 11 = $1,4xx,xxx (where XXX represents numbers) Line 20 = $x0x,x02 Line 27 = $1,4xx,xxx Line 30 = 0 Line 36 = $40,000 (credit the overpayment to next year) Form 1120 – Page 3 Part 1 – blank Part 2 – complete lines 13,15,18 and 21 Schedule K line 2a = 339900 Form 1120 – Page 4 Answer questions. For 15a and b, answer Yes, they were required to and they did file Forms 1099. Form 1120 – Page 5 – Schedule L (Balance Sheet) Leave beginning of year information/columns blank (columns (a) and (b)) Complete columns (c) and (d) with ending numbers. Reminder: you will get these numbers off the financial statement you prepared. Line 1 = x2x,3×2 Line 2b = 3X,X00 Line 6 = 53,xxx Line 10b = 1XX,XXX Line 15 = $1,876,760 Line 18 = x00,xxx Line 20 = 6xx,xxx Line 22a = 1XX,XXX Line 25 = 36x,xx7 Form 1120 – Page 5 – Schedule M-1 Reconciliation of Income (Loss) Line 2: 19x,xxx) Line 6: 60x,xxx Line 10: 0 Form 1120 – Page 5 – Schedule M-2 Retained Earnings Line 1 = 0 Line 4 = 36x,xx7 Line 8 = 36x,xx7 Form 1125-A – Cost of Goods Sold Line 1 = 0 Line 8 = 5xx,0xx Section 263A does not apply and there was no change in determining quantities, etc. Form 1125-E – Compensation of Officers Complete for both officers Leave line 3 blank Schedule G Complete Part 2 Form 4562 Line 5 = 500,000 Line 9 = 500,000 Line 12 = 47x,xx2 Line 13 = 26,xxx You should complete lines 1 through 13 plus lines 14, 19, and 22. For the Section 179 on Form 4562, enter the used machine and the new machine on Line 6. You should take as much Section 179 on the used machines and the remaining amount on the new machine. Enter these numbers in Column C.