Question TAX FORM/RETURN PREPARATION PROBLEMS Knoxville Musical Sales, Inc. is locat

29 Jun Question TAX FORM/RETURN PREPARATION PROBLEMS Knoxville Musical Sales, Inc. is locat

Question
TAX FORM/RETURN PREPARATION PROBLEMS
Knoxville Musical Sales, Inc. is located at 5500 Kingston Pike, Knoxville, TN 37919. Thecorporation uses the calendar year and accrual basis for both book and tax purposes. It isengaged in the sale of musical instruments with an employer identification number (EIN)of 75-2012010. The company incorporated on December 31, 2006, and began businesson January 2, 2007. Table C:3-4 contains balance sheet information at January 1, 2010,and December 31, 2010. Table C:3-5 presents an income statement for 2010. Theseschedules are presented on a book basis. Other information follows the tables.

Knoxville Musical Sales, Inc.—Book Balance Sheet Information

January 1, 2010 December 31, 2010

Account Debit Credit Debit Credit

Cash $ 108,439 $ 510,574

Accounts receivable 429,570 499,500

Allowance for doubtful accounts $ 36,513 $ 42,458

Inventory 2,312,500 3,237,500

Investment in corporate stock 150,000 46,000

Investment in municipal bonds 30,000 30,000

Cash surrender value of insurance policy 40,000 50,000

Land 390,000 390,000

Buildings 1,250,000 1,250,000

Accumulated depreciation—Buildings 62,500 87,500

Equipment 928,000 2,840,000

Accumulated depreciation—Equipment 154,667 259,333

Trucks 210,000 210,000

Accumulated depreciation—Trucks 63,000 105,000

Deferred tax asset 15,815 14,436

Accounts payable 300,000 270,000

Notes payable (short-term) 500,000 400,000

Accrued payroll taxes 13,875 17,344

Accrued state income taxes 8,325 13,875

Accrued federal income taxes 79,541

Bonds payable (long-term) 1,800,000 2,500,000

Deferred tax liability 150,444 560,020

Capital stock—Common 925,000 925,000

Retain earnings—Unappropriated

Totals $5,864,324 $5,864,324 $9,078,010 $9,078,010

Knoxville Musical Sales, Inc.—Book Income Statement 2010

Sales $ 9,250,000

Returns )

Net sales $ 9,018,750

Beginning inventory $2,312,500

Purchases 5,087,500

Ending inventory )

Cost of goods sold )

Gross profit $ 4,856,250

Expenses:

Amortization $ –0–

Depreciation 229,267

Repairs 19,240

General ins. 50,875

Net premium-Off. life ins. 41,625

Officer’s compensation 601,250

Other salaries 370,000

Utilities 66,600

Advertising 44,400

Legal and accounting fees 46,250

Charitable contributions 27,750

Payroll taxes 57,813

Interest expense 194,250

Bad debt expense

Total expenses (1,792,264)

Gain on sale of equipment 91,600

Interest on municipal bonds 4,625

Net gain on stock sales 35,000

Dividend income

Net income before income taxes $ 3,206,311

Federal income tax expense (1,076,497)

State income tax expense )

Net income $ 2,060,439

Compensation of Officers (Schedule E):

Mary Travis 345-82-7091 100% 50% $271,250

John Willis 783-97-9105 100% 25% 165,000

Chris Parker 465-34-2245 100% 25%

Total

Bad Debts:

For tax purposes, the corporation uses the direct writeoff method of deducting bad debts.

For book purposes, the corporation uses an allowance for doubtful accounts. During 2010,

the corporation charged $37,000 to the allowance account, such amount representing actual

writeoffs for 2010.

Additional Information (Schedule K):

1 b Accrual 6-7 No

2 a 451140 8 Do not check box

b Retail sales 9 Fill in the correct amount

c Musical instruments 10 3

3 No 11 Do not check box

4 a No 12 Not applicable

b Yes; omit Schedule G 13 No

5 a No

b No

Organizational Expenditures:

The corporation incurred $9,500 of organizational expenditures on January 2, 2007.

For book purposes, the corporation expensed the entire expenditure. For tax purposes,

the corporation elected under Sec. 248 to deduct $5,000 in 2007 and amortize the

remaining $4,500 amount over 180 months, with a full month’s amortization taken for

January 2007. The corporation reports this amortization in Part VI of Form 4562 and

includes it in “Other Deductions” on Form 1120, Line 26.

Capital Gains and Losses:
The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2010, for
$89,000. The corporation acquired the stock on December 15, 2009, for $48,000. The
corporation also sold 75 shares of JSB Corp. common stock on June 17, 2010, for $50,000.
The corporation acquired this stock on September 18, 2008, for $56,000. The corporation
has a $10,000 capital loss carryover from 2009.

Fixed assets and Depreciation:
For book purposes: the corporation uses straight- line depreciation over the useful lives of assets as follows: Store building, 50 years: Equipment, 15 years(old) and ten years(new) and trucks, five years. The corporation takes a half-years depreciation in the year of acquisition and the year of disposition and assumes no salvage value. the book financial statements reflect these calculations.
For tax purposes: All assets are MACRS property as follows: store building , 39 yearnonrezidential real property: equipment, seven year property: and trucks five year property, and trucks , five year property.
The corporation acquired the store building for 1.25 $milion and placed it in service on january 2, 2007. The corporation acquired two pieces of equipment for 288,000 Equipment 1 and 640,000Equipment2. and placed them in service on january 2,2007. The corporation acquired the trucks for $210,000 and placed them in service on July 18,2008. The corporation did not make the expensing election under sec. 179 on any property acquire before 2009. Accumulated tax depreciation through December 31, 2009, on these properties is as follows:
Store buildings $94,863
Equipment 1 162,058
Equipment 2 360,128
Trucks 109,200
On September 1,2010. the corporation sold for $322,000 Equipment 1 that originally cost $288,000 on January 2,2007. the corporation had no sec.1231 losses from prior years. In a separate transaction on September 2, 2010, the corporation acquired and placed in service a piece of equipment costing 2.2 million. $These two transactions do not qualify as a like king exchange under reg. sec. 1.1031 (K)-1(a). The new equipment is seven year property. The corp. made the sec179 expensing election with regard to the new equipment and claimed bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2010 depreciation( reproduced in Appendix C of this text).
other information
The corporation’s activities do not qualify for the US production activities deduction.
Ignore the AMT and accumulated earnings tax.
The corporation received dividends ( see income statement) from taxable, domestic corporations, the stock of which Knoxville Musical Sales, Inc. owns less than 20 %.
The corporation paid 92,500 $ in cash dividents to its shareholders during the year and charged the payment directly to retained earnings.
The state income tax in is the exact amount of such taxes incurred during the year.
The corporation is not entitled any credits.

REQUIRED:
PREPARE THE 2010 CORPORATE TAX RETURN FOR KNOXVILLE MUSICAL SALES,INC. ALONGWITH ANY NECESARY SUPPORTING SCHEDULES.
OPTIONAL: