On November 1, 2005, Janet Morton and Kim Wong formed Pet Kingdom, Inc., to sell pets and pet supplies. Pertinent information regarding Pet Kingdom is summar¬ Tax Return Problem ized as follows:
• Pet Kingdom's business address is 1010 Northwest Parkway, Dallas, TX 75225; its tele¬phone number is (214) 555-2211; and its e-mail address is [email protected].
• The employer identification number is 11-1111111, and the principal business activity code is 453910.
• Janet and Kim each own 50% of the common stock; Janet is president and Kim is vice president of the company. No other class of stock is authorized.
• Both Janet and Kim are full-time employees of Pet Kingdom. Janet's Social Secu-rity number is 123-45-6789, and Kim's Social Security number is 987-65-4321.
• Pet Kingdom is an accrual method, calendar year taxpayer. Inventories are deter-mined using FIFO and the lower of cost or market method. Pet Kingdom uses the straight-line method of depreciation for book purposes and accelerated deprecia-tion (MACRS) for tax purposes.
• During 2014, the corporation distributed cash dividends of 8250,000. Pet Kingdom's financial statements for 2014 follow.
Income Statement
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Income
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Gross sales
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$5,750,000
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Sales returns and allowances
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(200,000)
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Net sales
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$5,550,000
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Cost of goods sold
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(2,300,000)
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Gross profit
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$3,250,000
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Dividends received from stock
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|
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Investments in less-than 20%-owned US. corporations
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43,750
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Interest income:
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State bonds
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$15,000
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Certificates of deposit
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20,000
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35,000
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Total Income
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$3,328,750
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Expenses
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Salaries-officers:
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Janet Morton
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$262,500
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Kim Wong
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262,500
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$525,000
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Salaries-clerical and sales
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725,000
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Taxes (state, local, and payroll)
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238,000
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Repairs and maintenance
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140,000
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Interest expense:
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|
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Loan to purchase state bonds
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$ 9,000
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Other business loans
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207,000
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216,000
|
|
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Advertising
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58,000
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|
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Rental expense
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109,000
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Depreciation'
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106,000
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|
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Charitable contributions
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38,000
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Employee benefit programs
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60,000
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Premiums on term life insurance policies on lives of Janet Morton and Kim
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|
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Wong; Pet Kingdom is the designated beneficiary
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40,000
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|
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Total expenses
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|
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(2,255,000)
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Net income before taxes
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$1,073,750
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Federal income tax
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|
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(356,023)
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Net income per books
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|
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$ 717,727
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• Depreciation for tax purposes is 5136,000. You are not provided enough detailed data to complete a Form 4562 (depreciation). If you solve this problem using H&R BLOCK Tax Software, enter the amount of depredation on line 20 of Form 1120.
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Assets
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January 1, 2014
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December 31, 2014
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Cash
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$ 1,200,000
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5 1,037,750
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Trade notes and accounts receivable
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2,062,500
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2,147,000
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Inventories
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2,750,000
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3,030,000
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Stock investment
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1,125,000
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1,125,000
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State bonds
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375,000
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375,000
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Certificates of deposit
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400,000
|
400,000
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Prepaid Federal tax
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-0-
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3,977
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Buildings and other depreciable assets
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5,455,000
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5,455,000
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Accumulated depreciation
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(606,000)
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(712,000)
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Land
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812,500
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812,500
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Other assets
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140,000
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128,500
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Total assets
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$13,714,000
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513,802,727
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Liabilities and Equity
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January 1, 2014
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December 31, 2014
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Accounts payable
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5 2,284,000
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5 1,975,000
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Other current liabilities
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175,000
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155,000
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Mortgages
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4,625,000
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4,575,000
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Capital stock
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2,500,000
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2,500,000
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Retained earnings
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4,130,000
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4,597,727
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Total liabilities and equity
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$13,714,000
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$13,802,727
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During 2014, Pet Kingdom made estimated tax payments of $90,000 each quarter to the IRS. Prepare a Form 1120 for Pet Kingdom for tax year 2014. Suggested software: 1-1&R BLOCK Tax Software.