CORPORATE TAX RETURN PROBLEM
Required:
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Complete Blue Catering Service Inc.'s (BCS) 2011 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.
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Form 4562 for depreciation is not required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120.
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Assume that BCS does not owe any alternative minimum tax.
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If any information is missing, use reasonable assumptions to fill in the gaps.
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The forms, schedules, and instructions can be found at the IRS Web site (www.irs.gov). The instructions can be helpful in completing the forms.
Facts:
Cara Siler, Janna Funk, and Valerie Cloward each own one-third of the common stock of Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2008. It has only one class of stock outstanding and operates as a C corporation for tax purposes. BCS caters all types of social events throughout southern California.
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BCS is located at 540 Waverly Way, San Diego, CA 92101.
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BCS's Employer Identification Number is 38-4743474.
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BCS's business activity is catering food and services. Its business activity code is 722300.
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The shareholders also work as officers for the corporation as follows:
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Cara is the chief executive officer and president (Social Security number 231-54-8976).
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Janna is the executive vice president and chief operating officer (Social Security number 798-56-3241).
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Valerie is the vice president of finance (BSocial Security number 879-21-4536).
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All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
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BCS uses the accrual method of accounting and has a calendar year-end.
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BCS made four equal estimated tax payments of $20,000 each. Its tax liability last year was $70,000. If it has overpaid its federal tax liability, BCS would like to receive a refund.
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BCS paid a dividend of $30,000 to its shareholders on November 1. BCS had ample earnings and profits (E&P) to absorb the distribution.
The following is BCS's audited income statement for 2011:
| BCS |
|
| Income Statement |
|
| For year ending December 31, 2011 |
|
|
Revenue from sales
|
$1,800,000
|
|
Sales returns and allowances
|
(5,000)
|
|
Cost of goods sold
|
(350,000)
|
|
Gross profit from operations
|
$1,445,000
|
|
?Other income:
|
|
|
Capital loss
|
(15,000)
|
|
Dividend income
|
25,000
|
|
Interest income (7,000 taxable)
|
10,000
|
|
Gross income
|
$1,465,000
|
|
????Expenses:
|
|
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Compensation
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(950,000)
|
|
Depreciation
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(10,000)
|
|
Bad debt expense
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(15,000)
|
|
Meals and entertainment
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(3,000)
|
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Maintenance
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(6,000)
|
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Property taxes
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(11,000)
|
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State income taxes
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(45,000)
|
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Other taxes
|
(44,000)
|
|
Rent
|
(60,000)
|
|
Interest
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(5,000)
|
|
Advertising
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(52,000)
|
|
Professional services
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(16,000)
|
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Employee benefits
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(32,000)
|
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Supplies
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(5,000)
|
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Other expenses
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(27,000)+
6000
|
|
Total expenses
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(1,281,000)
|
|
Income before taxes
|
184,000
|
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Federal income tax expense
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(62,000)
|
|
Net income after taxes
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$?122,000
|
Notes:
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BCS's inventory-related purchases during 2011 were $360,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of A?§263A do not apply to BCS.
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Of the $10,000 interest income, $1,250 was from a City of Irvine bond that was used to fund public activities (issued in 2005), $1,750 was from an Oceanside city bond used to fund private activities (issued in 2004), $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.
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BCS's dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000 shares of the stock in Clever Cakes at the beginning of the year. This represented 10 percent of SSM outstanding stock.
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On October 1, 2011, BCS sold 1,000 shares of its CC stock for $25,000. It had originally purchased these shares on April 18, 2008, for $40,000. After the sale, BCS owned 9 percent of CC.
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BCS's compensation is as follows:
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Cara $150,000
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Janna $140,000
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Valerie $130,000
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Other $530,000
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BCS wrote off $25,000 in accounts receivable as uncollectible during the year.
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BCS's regular tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.
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The $5,000 interest expense was from a business loan.
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Other expenses include $6,000 for premiums paid on term life insurance policies for which BCS is the beneficiary. The policies cover the lives of Cara, Janna, and Valerie.
The following are BCS's audited balance sheets as of January 1, 2011, and December 31, 2011.
| |
2011 |
| Assets |
January 1 |
December 31
|
| |
|
|
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Cash
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$?180,000
|
$?205,000
|
|
Accounts receivable
|
560,000
|
580,000
|
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Allowance for doubtful accounts
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(60,000)
|
(50,000)
|
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Inventory
|
140,000
|
150,000
|
|
U.S. government bonds12
|
20,000
|
20,000
|
|
State and local bonds
|
120,000
|
120,000
|
|
Investments in stock
|
400,000
|
360,000
|
|
Fixed assets
|
140,000
|
160,000
|
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Accumulated depreciation
|
(50,000)
|
(60,000)+
18,000
|
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Other assets
|
20,000
|
21,000
|
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Total assets
|
$1,470,000
|
$1,506,000
|
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?Liabilities and Shareholders' Equity
|
|
|
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Accounts payable
|
280,000
|
240,000
|
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Other current liabilities
|
20,000
|
18,000
|
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Other liabilities
|
40,000
|
26,000
|
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Capital stock
|
400,000
|
400,000
|
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Retained earnings
|
730,000
|
822,000
|
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Total liabilities and shareholders' equity
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$1,470,000
|
$1,506,000
|