Question 1: Menominee Corporation, whose books were kept on the accrual method, showed the following cash receipts and disbursements for 2010:
Receipts:
Cash sales $245,862
Collection of receivables 833,317
Interest on notes receivable 654
Disbursements:
Purchases $639,034
Bank loan ($794 interest and $12,048 principal) 12,842
Fire and casualty insurance premium 3, 870
Other operating expenses 374,377
Payments for returned merchandise 5,629
Receivables collected in 2010 included 2009 receivables totaling $32,561. Interest collected on notes receivable included $78 accrued in 2009. Disbursements included payments for 2009 purchases of $21,725 and other 2009 operating expenses of $7,541. The bank loan payments were on amounts that accrued in 2010.
The following amounts were accrued as of December 31, 2010:
Accounts and notes receivable $41,578
Interest on notes receivable 27
Accounts payable 27,652
Other operating expenses 6,687
Merchandise inventories were valued at $123,428 on January 1,2010 and at $135,233 on December 31,2010.
The fire and casualty insurance premium paid in 2010 was for two-year period beginning May1, 2010. The three-year policy that expired on April 30,2010, had cost $1,785.
Menominee is entitled to depreciation on the following assets:
Description of Property Date Acq. Cost
Office building 1/1/1993 $68,000
Copy machine 1/1/2008 8,000
Printer 6/1/2008 4,000
Computer 4/10/2006 700
Furniture 8/1/2007 6,781
Assume that this is the only depreciable property that Menominee has placed in service in a trade or business for the relevant time frame. Of the $68,000 cost of the office building, $5,000 is allocable to land. The corporation did not take the Code Sec.179 deduction for any of these properties. Assume also that Menominee did not claim any first –year additional “bonus depreciation,” making any necessary elections.
Compute Menominee’s taxable income in 2010.
Question 2:
Webster, Inc. has the following items of income and expenses for 2010, its first year of operations. Webster began operations on April 1 and used a calendar year end.
Gross receipts from sales $414,389
Charitable contributions 15,000
Employment taxes 10,250
Interest expense 30,000
Organizational costs 52,600
Office rent expense 31,000
Real estate taxes 15,600
Utilities expense 11,300
Wages expense 93,540
In addition to these items, Webster purchased machinery and equipment costing $624,000 and furniture costing $32,000 on April 9, 2010 and a warehouse costing $190,000 on May 2, 2010.
Webster wants to minimize its 2010 income tax liability, which means electing Section 179 expense for the maximum the tax law allows. Compute Webster’s 2010 taxable income and income tax liability.