CORPORATE TAX RETURN PROBLEM 2
Required:
Complete Blue Catering Service Inc.'s (BCS) 2018 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.
Form 4562 for depreciation is not required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120.
If any information is missing, use reasonable assumptions to fill in the gaps.
The forms, schedules, and instructions can be found at the IRS Web site (www.irs.gov). The instructions can be helpful in completing the forms.
Facts:
Cara Siler, Janna Funk, and Valerie Cloward each own one-third of the common stock of Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2010. It has only one class of stock outstanding and operates as a C corporation for tax purposes. BCS caters all types of social events throughout southern California.
BCS is located at 540 Waverly Way, San Diego, CA 92101.
BCS's Employer Identification Number is 38-4743474.
BCS's business activity is catering food and services. Its business activity code is 722300.
The shareholders also work as officers for the corporation as follows:
Cara is the chief executive officer and president (Social Security number 231-54-8976).
Janna is the executive vice president and chief operating officer (Social Security number 798-56-3241).
Valerie is the vice president of finance (Social Security number 879-21-4536).
All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
BCS uses the accrual method of accounting and has a calendar year-end.
BCS made four equal estimated tax payments of $10,000 each. Its tax liability last year was $70,000. If it has overpaid its federal tax liability, BCS would like to receive a refund.
BCS paid a dividend of $30,000 to its shareholders on November 1. BCS had ample earnings and profits (E&P) to absorb the distribution.
The following is BCS's audited income statement for 2018:
BCS
|
|---|
Income Statement
|
|---|
For year ending December 31, 2011
|
|---|
Revenue from sales
|
$1,800,000
|
Sales returns and allowances
|
(5,000)
|
Cost of goods sold
|
(350,000)
|
Gross profit from operations
|
$1,445,000
|
Other income:
|
|
Capital loss
|
(15,000)
|
Dividend income
|
25,000
|
Interest income
|
10,000
|
Gross income
|
$1,465,000
|
Expenses:
|
|
Compensation
|
(950,000)
|
Depreciation
|
(10,000)
|
Bad debt expense
|
(15,000)
|
Meals and entertainment
|
(3,000)
|
Maintenance
|
(6,000)
|
Property taxes
|
(11,000)
|
State income taxes
|
(45,000)
|
Other taxes
|
(44,000)
|
Rent
|
(60,000)
|
Interest
|
(5,000)
|
Advertising
|
(52,000)
|
Professional services
|
(16,000)
|
Employee benefits
|
(32,000)
|
Supplies
|
(5,000)
|
Other expenses
|
(27,000)
|
Total expenses
|
(1,281,000)
|
Income before taxes
|
184,000
|
Federal income tax expense
|
(62,000)
|
Net income after taxes
|
$122,000
|
Notes:
1. BCS's inventory-related purchases during 2018 were $360,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §236A do not apply to BCS.
2. Of the $10,000 interest income, $1,250 was from a City of Irvine bond issued in 2015, $1,750 was from an Oceanside city bond issued in 2014, $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.
3. BCS's dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000 shares of stock in Clever Cakes at the beginning of the year. This represented 10 percent of SSM outstanding stock.
4. On October 1, 2018, BCS sold 1,000 shares of its CC stock for $25,000. It had originally purchased these shares on April 18, 2013 for $40,000. After the sale, BCS owned 9 percent of CC.
5. BCS's compensation is as follows:
-Cara, $150,000
-Janna, $140,000
-Valeria, $130,000
6. BCS wrote off $25,000 in accounts receivable uncollectible during the year.
7. BCS's tax depreciation was $28,000. None of the depreciated should be claimed on Form 1125A.
8. The $5,000 interest expense was from a business loan.
9. Other expenses include $6,000 for premiums paid on term life insurance policies for which BCS is the beneficiary. The policies cover the lives of Cara, Janna, and Valerie.
The following are BCS;s audited balance sheets as of January 1, 2018, and December 31, 2018.
BCS Balance Sheet 2018 |
January 1 |
December 31 |
Assets
|
|
|
Cash |
$180,000 |
$205,000 |
Accounts receivable |
560,000 |
580,000 |
Allowance for doubtful accounts |
(60,000) |
(50,000) |
Inventory |
140,000 |
150,000 |
U.S. government bonds |
20,000 |
20,000 |
State and local bonds |
120,000 |
120,000 |
Investments in stock |
400,000 |
360,000 |
Fixed assets |
140,000 |
160,000 |
Accumulated depreciation |
(50,000) |
(60,000) |
Other assets |
20,000 |
21,000 |
Total assets |
$1,470,000 |
$1,506,000 |
Liabilities and Shareholders' Equity
|
|
|
Accounts payable |
$280,000 |
$240,000 |
Other current liabilities |
20,000 |
18,000 |
Other liabilities |
40,000 |
26,000 |
Capital stock |
400,000 |
400,000 |
Retained earnings |
730,000 |
822,000 |
Total liabilities and shareholders' equity |
$1,470,000 |
$1,506,000 |