Bottle-Up, Inc., was organized on January 8, 2000, and made its S election on January 24, 2000. The necessary consents to the election were filed in a timely manner. Its federal tax identification number is 38-1507869. Its address is 1234 Hill Street, Gainesville, FL 32607. Bottle-Up uses the calendar year as its tax year, the accrual method of accounting, and the first-in, first-out (FIFO) inventory method. Bottle-Up manufactures ornamental glass bottles. It made no changes to its inventory costing methods this year. It uses the specific identification method for bad debts for book and tax purposes. Herman Hiebert (S.S. No. 123-45-6789) and Melvin Jones (S.S. No. 100-67-2000) own 500 shares each. Both individuals materially participate in Bottle-Up's single activity. Herman Hiebert is the tax matters person. Financial statements for Bottle-Up for the current year are shown in Tables C:11-2 through C:11-4. Assume that Bottle-Up's business qualifies as a U.S. production activity and that its qualified production activities income is $90,000. The S corporation uses the small business simplified overall method for reporting these activities (see discussion for Line 12d of Schedules K and K-1 in the Form 1120S instructions). Prepare a current year S corporation tax return for Bottle-Up, showing yourself as the paid preparer.
TABLE C:11-2
Bottle-Up, Inc. Income Statement for the Year Ended December 31 of the Current
Year (Problem C:11-63)
Sales $2,500,000
Returns and allowances (15,000 )
Net sales $2,485,000
Beginning inventory $ 102,000
Purchases 900,000
Labor 200,000
Supplies 80,000
Utilities 100,000
Other manufacturing costs 188,000 a
Goods available for sale $1,570,000
Ending inventory (96,000 ) 1,474,000 b
Gross profit $1,011,000
Salaries c $ 451,020
Utilities expense 54,000
Depreciation (MACRS depreciation is $36,311) 11,782
Automobile and truck expense 26,000
Office supplies expense 9,602
Advertising expense 105,000
Bad debts expense 620
Rent expense 30,000
Interest expense d 1,500
Meals and entertainment expense 21,000
Selling expenses 100,000
Repairs and maintenance expense 38,000
Accounting and legal expense 4,500
Charitable contributions e 9,000
Insurance expense f 24,500
Hourly employees' fringe benefits 11,000
Payroll taxes 36,980
Other taxes 2,500
Penalties (fines for overweight trucks) 1,000 (938,004)
Operating profit $ 72,996
Other income and losses:
Long-term gain on sale of capital assets $ 48,666g
Sec. 1231 loss (1,100) h
Interest on U.S. Treasury bills 1,200
Interest on State of Florida bonds 600
Dividends from domestic corporations 11,600
Investment expenses (600) 60,366
Net income 133,362
a. Total MACRS depreciation is $74,311. Assume that $38,000 of depreciation has been allocated to cost of sales for both book and tax purposes so that the book and tax inventory and cost of sales amounts are the same. The AMT depreciation adjustment on personal property is $9,000.
b. The cost of goods sold amount reflects the Uniform Capitalization Rules of Sec. 263A. The appropriate restatements have been made in prior years.
c. Officer salaries of $120,000 are included in the total. All are employer's W-2 wages.
d. Investment interest expense is $500. All other interest expense is trade- or business-related. None of the interest expense relates to the production of tax-exempt income.
e. The corporation made all contributions in cash to qualifying charities.
f. Includes $3,000 of premiums paid for policies on lives of corporate officers. Bottle-Up is the beneficiary for both policies.
g. The corporation acquired the capital assets on March 3, 2007 for $100,000 and sold them on September 15, 2009, for $148,666.
h. The corporation acquired the Sec. 1231 property on June 5, 2008 for $10,000 and sold it on December 21, 2009, for $8,900.
TABLE C:11-3
Bottle-Up, Inc. Balance Sheet for January 1 and December 31 of the Current Year
(Problem C:11-63)
January 1 December 31
Assets:
Cash $ 15,000 $116,948
Accounts receivable 41,500 45,180
Inventories 102,000 96,000
Stocks 103,000 74,000
Treasury bills 15,000 16,000
State of Florida bonds 10,000 10,000
Building and equipment 374,600 375,000
Minus: Accumulated depreciation (160,484) (173,100)
Land 160,000 190,000
Total $660,616 $750,028
Liabilities and equities:
Accounts payable $ 36,000 $ 10,000
Accrued salaries payable 12,000 6,000
Payroll taxes payable 3,416 7,106
Sales taxes payable 5,200 6,560
Due to Mr. Hiebert 10,000 5,000
Mortgage and notes payable (current maturities) 44,000 52,000
Long-term debt 210,000 260,000
Capital stock 10,000 10,000
Retained earnings 330,000 393,362
Total $660,616 $750,028
TABLE C:11-4
Bottle-Up, Inc. Statement of Change in Retained Earnings, for the Current Year
Ended December 31 (Problem C:11-63)
Balance, January 1 $330,000a
Plus: Net income $133,362
Minus: Dividends (70,000 ) 63,362
Balance, December 31 $393,362
a. The January 1 accumulated adjustments account balance is $274,300."