Assignment
MIKE'S SPORTING GOODS, INC. A "C" CORPORATION 1120 RETURN PROJECT
As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike's Sporting Goods, Inc.
Mike's Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC, all of whom were state champions in various sports. Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row. Mike won the state championship as a sprinter all four years of college.
Starting the company was Mike's idea, he owns the largest percentage of stock, and is the only owner who works in the business. The other three investors brought money to the table, but never planned on working in the sporting goods store. Therefore, no one questioned Mike when he suggested naming the corporation Mike's Sporting Goods, Inc. In addition, Mike has always had a strong desire to be known as the big guy on campus even after graduation.
Location
As the old saying goes, Location, location, location. Luckily, Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses. After showing the location to the other investors, everyone agreed it would attract their target market of young athletic enthusiasts. As corporate officers, Mike and Juan signed a ten-year lease that required $9,200 per year in rent.
The building was built just a few years ago, so minimal expense was projected for maintenance and repairs. In 20Y5, Mike kept repairs expense down to $800, which really pleased Juan, Elroy, and Scott.
Corporate investments
During 20Y5, Mike's Sporting Goods, Inc. received the following investment incomes:
Interest from its own Accounts Receivables = $1,500
Interest from corporate bonds = $4,000
Interest from tax-exempt state bonds = $5,000
Dividends from various U.S. corporations = $10,000
o Mike's Sporting Goods, Inc. owns 20% of the stock of one corporation
Since Mike's Sporting Goods, Inc. did not have a net operating loss, its only entry on line 29 is the dividends-received deduction of $8,000 from Schedule C, page 2.
Year-end 20Y5, includes a $3,600 capital losses from the sale of securities.
Revenue from Sales
The corporation, which uses an accrual basis of accounting on a calendar year, brought in $2,910,000 in gross sales in 20Y5. Just less than 1% of gross sales were returned, thus bringing net sales to $2,890,000. Thanks to Mike's purchasing savvy, cost of goods sold was $2,050,000, which is less than the industry standard of 80% of sales.
Other Expenses:
Advertising
While the stockholder's had intended on spending more on advertising, Mike only spent $8,700 and most of it was in Website development.
Bad debt expense
The corporation uses the specific account write off method for uncollectible accounts receivable. A total of $1,600 in accounts receivable were written off in 20Y5.
Charitable contributions
During the year, Mike's Sporting Goods, Inc. contributed $11,400 to the UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic Scholarship Fund.
Depreciation
On Line 8(a) of the Schedule M of the 1120, Mike's Sporting Goods, Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation's books.
Total depreciation from Form 4562 (not illustrated) is $17,600. $12,400 is included as cost of goods sold in Line 5 of the Form 1125-A. Enter the balance of $5,200 on line 20. Book Depreciation is $15,980.
Interest expense:
Mike's Sporting Goods, Inc. incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up. Elroy is a securities broker with a national brokerage firm, therefore he handles all corporate investments. In 20Y5, the corporation accrued $27,200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds.
Salaries
When the corporation was first formed, the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow. Thus, they agreed to pay Mike $55,000 per year, since he will manage the store, and $5,000 per year to the other stockholders.
Thereby, total officers salaries will be $70,000 per year for the first five years. Hint: use Schedule E.
Since Mike will be handling the ordering, inventory management, and other administrative tasks, all employees will be in sales. Given the nature of sporting goods stores, everyone agreed the staff should be college students currently attending UMUC. Their goal was to keep wages below $50,000 per year. In 20Y5, Mike managed to keep total wages at $44,000.
All other expenses
All other expenses of operating Mike's Sporting Goods, Inc. totals $78,300. These expenses include legal fees, office expenses, and sales commissions. Attach a schedule that itemizes these expenses to the return.
Taxes and credits Taxes:
At December 31, 20Y5, the corporation had $55,387 in accrued federal income taxes.
Mike's Sporting Goods, Inc. made four estimated tax payments totaling $69,117 as follows:
$17,280 on 4/15/20Y5
$17,280 on 6/15/20Y5
$17,280 on 9/15/20Y5
$17,871 on 1/15/20Y6
See the cancelled checks in Appendix F. Tax Credits:
The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs. Given the high unemployment rate of college students, Mike's Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit. Hint: use Form 5884. The credit will then carry over to the Schedule J of the 1120.
Reconciling Book to Return:
Mike's Sporting Goods, Inc. has the following non-deductible expenses on its Income Statement Per Books:
|
Premiums paid on term life insurance on corporate officers
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$9,500
|
|
Interest paid to purchase tax-exempt state bonds
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850
|
|
Nondeductible contributions
|
500
|
|
Reduction of salaries by work opportunity credit
|
6,000
|
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Total
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$16,850
|
Deductible state and local taxes (not federal income tax) totaled $15,000
If Mike's Sporting Goods, Inc. owes income tax, the corporation will mail a check; if, otherwise, credit any overpayment to next years estimated taxes.
III. Steps to Completion:
Prepare IRS Form 1120
1. Prepare Schedules M-1: Reconciliation of Income (Loss) per Books with Income per Return using financial data in the Appendices.
2. Prepare Schedule M-2: Analysis of Unappropriated Retained Earnings per Books using financial data in the Appendices.
IV. Deliverables:
The following forms and schedules, combined as a single PDF document, are required:
Form 1120
Form 4562: Depreciation and Amortization
Schedule C: Total Special Deductions
Schedule D: Net Long-Term Capital Gains or Losses
Schedule J: Total Tax
Schedule J: Total Payments and Credits
Schedule K: Accuracy
Schedule L: End of Tax Year: Total Liabilities and Stockholder's Equity
Form 8949: Totals for Proceeds, Basis, & Gain/Loss
Form 1125-A: Total for Cost of Goods Sold
Form 3800: General Business Credit: Credit Allowed for the Current Year
M-1 Income
M-2 Balance at End of Year
In addition, each student must separately submit their Group Contribution Report in their Assignment folder.
Appendices: Table of Contents
• Appendix A: Basic corporate information
• Appendix B: List of select Accounts and Balances per Book
o (Financial basis, NOT tax basis)
• Appendix C: Income Statement per Books
o (Financial basis, not tax)
• Appendix D: Comparative Balance Sheet per Books
o (Financial basis, not tax)
• Appendix E: General Ledger Retained Earnings account in T-account format.
• Appendix F: Cancelled checks to the Internal Revenue Service for estimated quarterly tax payments
APPENDIX A: Basic corporate information
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Corporate Name
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Mike's Sporting Goods, Inc.
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Corporate Address
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422 Bruce Lane Annapolis, MD 21401
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Federal Tax ID
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52-9746858
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Corporate officers:
|
|
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President/CEO
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Michael S. Duke
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Vice President
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Juan Delaross
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Treasurer
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Elroy Mulcane
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Secretary
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Scott Barnett
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APPENDIX B: List of select Accounts and Balances per Book (financial-basis, not tax basis). Account balances may or may not be reported on Form 1120.
Hint: You will need these items to prepare Schedule M of the 1120.
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Account
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Account Balance
|
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Advertising
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8,700
|
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Bad debts
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1,600
|
|
Charitable Contributions to Not-for-Profit organizations
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24,000
|
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Charitable Contributions to political campaigns
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500
|
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Compensation of officers
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70,000
|
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Cost of goods sold
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2,050,000
|
|
Depreciation--indirect
|
3,580
|
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Dividends received
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10,000
|
|
Federal income tax accrued
|
55,387
|
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Interest expense on note to buy tax-exempt state bonds
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850
|
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Interest expense on note to buy corporate bonds
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27,200
|
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Interest income on tax exempt state bonds
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5,000
|
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Interest income on taxable corporate bonds
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5,500
|
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Loss on securities
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3,600
|
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Maintenance and Repairs
|
800
|
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Net income per books after tax
|
517,783
|
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Other operating expenses
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78,300
|
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Premiums on life insurance
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9,500
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Proceeds from life insurance
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9,500
|
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Rental expense
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9,200
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Salaries and wages--indirect
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44,000
|
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Sales - gross
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2,910,000
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Sales returns and allowances
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20,000
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State and Local Taxes
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15,000
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APPENDIX C: Income Statement per Book (financial, not tax)
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Mike's Sporting Goods, Inc.
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Income Statement (per Books)
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Year ending 20Y5
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|
|
|
|
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Revenue:
|
|
|
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Gross sales
|
|
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$ 2,910,000
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Less: Returns & allowances
|
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20,000
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Net sales
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2,890,000
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Cost of goods sold
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2,050,000
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Gross Margin
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|
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840,000
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|
|
|
|
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Operating expenses:
|
|
|
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Advertising
|
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8,700
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|
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Bad debt
|
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1,600
|
|
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Charitable contributions:
|
|
|
|
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Deductible
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24,000
|
|
|
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Non-deductible
|
500
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24,500
|
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Depreciation
|
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3,580
|
|
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Equipment rental
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9,200
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Life insurance
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9,500
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Maintenance & repairs
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|
800
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Officers compensation
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70,000
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Salaries and wages
|
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44,000
|
|
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Total operating expenses
|
|
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171,880
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Operating Income
|
|
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668,120
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Other revenue and gains:
|
|
|
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Dividend income
|
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10,000
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|
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Interest income: Maryland bonds
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5,000
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Interest income: All other bonds
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5,500
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Proceeds from life insurance
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9,500
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Total other revenue and gains
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30,000
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|
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Other expenses and losses:
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|
|
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Accrued federal income taxes
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55,387
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|
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Other operating expenses
|
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78,300
|
|
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Loss on investments
|
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3,600
|
|
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Total other expenses and losses
|
|
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137,287
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Total income before interest and taxes
|
|
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560,833
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Interest expense on note to purchase tax- exempt bonds
|
850
|
|
|
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Interest expense on all other notes
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27,200
|
28,050
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Income before tax
|
|
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532,783
|
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Less: State & Local Income tax
|
|
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15,000
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Net income per books after tax
|
|
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517,783
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APPENDIX D: Comparative Balance Sheet per Books (financial, not tax)
|
Mike's Sporting Goods, Inc.
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Balance Sheet per Books
|
|
December 31, 20Y4 and 20Y5
|
|
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Year Ending 20Y4
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Year ending 20Y5
|
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Assets
|
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Cash
|
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114,700
|
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329,564
|
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Accounts receivable (net)
|
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98,400
|
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235,001
|
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Inventory
|
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426,000
|
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495,479
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Tax-exempt securities
|
|
100,000
|
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120,000
|
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Other current assets
|
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26,300
|
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17,266
|
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Other investments
|
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100,000
|
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80,000
|
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Buildings
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272,400
|
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296,700
|
|
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Accumulated depreciation
|
88,300
|
184,100
|
104,280
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192,420
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Land
|
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20,000
|
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20,000
|
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Other assets
|
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14,800
|
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19,300
|
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Total assets
|
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1,084,300
|
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1,509,030
|
|
|
|
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|
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Liabilities & Stockholder's Equity
|
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Accounts payable
|
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428,500
|
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334,834
|
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Notes payable (short term)
|
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4,300
|
|
4,300
|
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Other current liabilities
|
|
6,800
|
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7,400
|
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Notes payable (long term)
|
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176,700
|
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264,100
|
|
|
|
|
|
|
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Stockholder's Equity
|
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Common stock
|
|
200,000
|
|
200,000
|
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Retained earnings: Appropriated
|
|
30,000
|
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40,000
|
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Retained earnings: Unappropriated
|
|
238,000
|
|
658,396
|
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Total liabilities & Stockholder's equity
|
|
1,084,300
|
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1,509.030
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APPENDIX E: General ledger Retained Earnings account in T-account format
|
General Ledger Retained Earnings Account
|
|
Explanations:
|
Debits
|
Credits
|
Explanations:
|
|
Contingencies
|
10,000
|
238,000
|
Beg balance
|
|
Accrued income tax
|
55,387
|
532,783
|
Net Income before tax
|
|
Dividends paid
|
65,000
|
18,000
|
Income tax refund
|
|
Ending balance
|
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658,396
|
|
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APPENDIX F: Canceled checks
Attachment:- Project.pdf