S CORPORATION TAX RETURN PROBLEM Required: Using the information provided below, complete Salt Source Inc. s (SSI) latest Form 1120S. Also complete Kim Bentley s Schedule K-1. 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 1120S. If any information is missing, use reasonable assumptions to fill in the gaps. 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: Salt Source Inc. (SSI) was formed as a corporation on January 5, 2008, by its two owners Kim Bentley and James Owens. SSI immediately elected to be taxed as an S corporation for federal income tax purposes. SSI sells salt to retailers throughout the Rocky Mountain region. Kim owns 70 percent of the SSI common stock (the only class of stock outstanding) and James owns 30 percent. SSI is located at 4200 West 400 North, Salt Lake City, UT 84116. SSI s Employer Identification Number is XXXXX SSI s business activity is wholesale sales. Itsbusiness activity code is 424990. Both shareholders work as employees of the corporation. Kim is the president of SSI (Social Security number XXX-XX-XXXX). Kim s address is 1842 East 8400 South, Sandy, UT 84094. James is the vice president of SSI (Social Security number XXX-XX-XXXX). James s address is 2002 East 8145 South, Sandy, UT 84094. SSI uses the accrual method of accounting and has a calendar year-end. C-18 Appendix C The following is SSI s 2011 income statement: SSI Income Statement For year ending December 31, 2011 Revenue from sales 980000 Sales returns and allowances (10000) Cost of goods sold (110000) Gross profit from operations 860000 Other income: Dividend income 15000 Interest income 5000 Gross income 880000
Expenses: Compensation ($600,000) Depreciation (10000) Bad debt expense (14000) Meals and entertainment (2000) Maintenance (8,000) Business interest (1000) Property taxes (7000) Charitable contributions (10000) Other taxes (30000) Rent (28000) Advertising (14000) Professional services (11000) Employee benefits (12000) Supplies (3,000) Other expenses (21000) Total expenses (771000) Net income 109000 Notes:
1. SSI s purchases during 2011 were $115,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to SSI.
2. Of the $5,000 interest income, $2,000 was from a West Jordan city bond used to fund public activities (issued in 2007) and $3,000 was from a money market account.
3. SSI s dividend income comes from publicly traded stocks that SSI has owned for two years.
4. SSI s compensation is as follows: Kim $120,000 James $80,000 Other $400,000.
5. SSI wrote off $6,000 in accounts receivable as uncollectible during the year.
6. SSI s regular tax depreciation was $17,000. AMT depreciation was $13,000,
7. SSI distributed $60,000 to its shareholders.
8. SSI is not required to compute the amount in its accumulated adjustments account.
The following are SSI s book balance sheets as of January 1, 2011, and December 31, 2011. Assets Cash Jan1 90000 dec31 143000 Accounts receivable 300000 310000 Allowance for doubtful accounts (60000) (68000) Inventory 45,000 50000 State and local bonds 38000 38000 Investments in stock 82000 82000 Fixed assets 100000 100000 Accumulated depreciation (20000) (30000) Other assets 20000 21000 Total assets 595000 646000 Liabilities and Shareholders Equity Accounts payable 60000 55000 Other current liabilities 5000 8000 Other liabilities 10000 14000 Capital stock 200000 200000 Retained earnings 320000 369000 Total liabilities and shareholders equity 595000 646000