1 Notes
15bf038b617c4f9c397cb342cc631cb63c491785.xls
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Background Information
Charlotte Corp. was started on 1-1-2011 with an investment of $400,000 by the current owner. It has completed its first year of operations. It has not paid dividends. The company purchased some investments and some fixed assets. The company has accounts payable at the end of its first year. You are given a complete trial balance at the end of the first year (GAAP, not tax). That trial balance shows balances for assets, liabilities (accounts payable) owner equity (capital stock), revenues and expenses. You will note that since this is the end of the first year and the books have not been closed, there is no balance in retained earnings. The closing process will cause retained earnings to have a balance.
Notes
1 The revenues and expenses (next tab) are based on GAAP, not tax law. Federal income tax expense is an expense on the GAAP income statement, but it is not a deductible expense on the federal corporate income tax. (We compute Federal income tax on the tax return but we do not claim a deduction for it.) [In contrast, state income tax is deductible.] When computing federal corporate taxable income, it will be necessary to add back (un-deduct) the $40,000 payment for federal income tax [that is shown among the expenses that are subtracted from revenue to get book income of $76,000]. The company uses the allowance method for bad debts. It set up an allowance account and recorded bad debts expense for $7,000, even though there has been no write-off of bad debts in 2011. The direct write-off method must be used for tax purposes. Charlotte Corporation shows a charitable contribution of $40,000 among its "book" expenses. It is necessary to add that back to get an "adjusted" taxable income figure that is "before deducting charitable contributions." Deduction for Charitable contributions limited to 10% of T.I. [T.I. before deducting charitable contribution]. After computing the deductible amount for charity, you enter that deduction on the tax return. Charlotte Corporation has invested in tax-exempt North Carolina bonds and earned tax-free income of $14,000. That is income for GAAP purposes, but not for corporate taxable income computations. It needs to be removed (un-included). Charlotte Corporation had capital losses of $15,000 (or capital losses exceeding capital gains by $15,000 the problem does not indicate how many capital assets were sold, etc.) A corporation can only deduct capital losses against capital gains. Excess capital losses are carried to other years. Charlotte Corporation spent $18,000 on entertainment expense, but that is only deductible to the extent of 50% on the corporate tax return. Charlotte Corp. shows deprec. expense of $16,000 on its GAAP trial balance (and in its financial statements) but it wishes to deduct depreciation exp. of $20,000 on its tax return. Charlotte Corporation received dividend income of $10,000 on IBM stock. That is income for both GAAP and tax purposes. For tax purposes, the company can take a special deduction of 70% of $10,000. This deduction is provided to eliminate some of the potential "triple tax" here: a. IBM's income tax paid on its income, b. Charlotte Corporation's income tax paid on the dividend income received from IBM, and c. The stockholder's income tax to be paid on dividends received from Charlotte Corporation [which would consist partly of money that came originally from IBM]. These are the reasons for the numerous adjustments to book income (GAAP income) that is based on the revenue and expense accounts shown in the trial balance. Also the reason for the special deduction near the bottom of page 1 of Form 1120. The file also contains the completed balance sheet at the end of the year, the reconciliation book income and taxable income (M-1)and the retained earnings statement (M-2).
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3
4
5 6
7 8 9 10
12 13 14
Tab: C Corp - Tax Return Prob-2011
File: 15bf038b617c4f9c397cb342cc631cb63c491785.xls.
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Corporate Tax Return Problem
Name: _____________________
Using the information below, please determine if the Form 1120 for the Charlotte Corporation is correct. [A blank copy of Form 1120-Pg. 1 is provided in case you wish to work the problem before checking the instructor's answer.] The corporation was started on January 1, 2011. Schedules A, C, E, J, and K are omitted The corporation is not a member of a controlled group.
Cash Accounts receivable Allowance for Bad Debts Investment in IBM Stock Investment in North Carolina Bonds (7%) Fixed assets Accumulated depreciation Accounts payable Capital stock Retained earnings Service revenue Dividend income Interest income Salary expense for employees Payroll taxes Bad debts expense (Note 1) N. C. Corp. estimated income taxes - 2011 Federal Corp. estimated income taxes - 2011 Rent expense Depreciation expense (Note 2) Entertainment expenses Capital loss Charitable Contribution December 31, 2011 Dr Cr. $24,000 48,000 $7,000 100,000 200,000 200,000 16,000 73,000 400,000 600,000 10,000 14,000 300,000 29,000 7,000 10,000 40,000 73,000 16,000 18,000 15,000 40,000
Trial Balance Total
Total Revenue Total Expenses Net income per books
$1,120,000
548,000 76,000
$1,120,000
624,000
Note 1. The company uses the allowance method for bad debts. None were written off. Note 2. Depreciation for tax purposes is $20,000
Tab: ComputeTaxableIncome
File: 15bf038b617c4f9c397cb342cc631cb63c491785.xls.
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Net income (loss) per books
Bad Debts (Must use direct write-off method) Charitable contribution (remove before computing limit) Tax-exempt interest (not included in taxable income) Federal income tax (not a deductible item) Excess capital losses (capital losses limited to cap gains) Travel and entertainment disallowed (50%) Depreciation Expense (see footnote) Base for charitable contribution limit Limit on charity deduction (10%) Actual Contributions Carryover
$76,000 7,000 40,000 (14,000) 40,000 15,000 9,000 (4,000) 169,000 16,900 40,000 23,100
Taxable income before Charity & Div. Ded. Charitable contribution deduction Taxable Income before Div. Rec. Ded. Dividends received deduction
169,000 (16,900) 152,100 (7,000) $145,100 50,000 25,000 25,000 45,100 145,100 15% 25% 34% 39% 7,500.00 6,250.00 8,500.00 17,589.00 39,839.00
Taxable income
Income Tax Computation
Tab: 1120-front
File: 15bf038b617c4f9c397cb342cc631cb63c491785.xls
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Name:________________________ Class ________ Row:_________
Student ID Number
1120
1a 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 a 20 b 21 22 23 24 25 26 27 28 29
U.S. Corporation Income Tax Return
2011
Gross Receipts b. Less: Returns Bal 1c Cost of Goods Sold.................................................................................................... 2 Gross Profit.................................................................................................... 3 Dividends.................................................................................................... 4 Interest........................................................................................................ 5 Gross Rents....................................................................................................... 6 Gross royalties.................................................................................................... 7 Capital gain net income.................................................................................................... 8 Net gain or (loss) from Form 4797, Part II, Line 17.............................................................................................. 9 Other Income.................................................................................................... 10 Total Income.................................................................................................... 11 Compensation of officers.................................................................................................... 12 Salaries and Wages.................................................................................................... 13 Repairs and Maintenance.................................................................................................... 14 Bad debts.................................................................................................... 15 Rents............................................................................................................... 16 Taxes and licenses.................................................................................................... 17 Interest........................................................................................................... 18 Charitable contributions.................................................................................................... 19 Depreciation (attach form 4562).................................................................................................... 20 a Less depreciation claimed on Schedule A.................................................................................................... 20 b 20c Depletion........................................................................................................ 21 Advertising.................................................................................................... 22 Pension, profit-sharing, etc.................................................................................................... 23 Employee benefit plans.................................................................................................... 24 Domestic production activities deduction (attach Form 8903) ................................ 25 Other Deductions.................................................................................................... 26 Total Deductions.................................................................................................... 27 Taxable income before net operating loss and special deductions............................................................................ 28 Less: a. Net operating loss.................................................................................................... 29a b. Special deductions.................................................................................................... 29b 29c 30 Taxable income ....................................................................................................30 31 Total Tax......................................................................................................... 31 2010 overpayment credited to 2011.................................................................................................... 32 32a b 2011 Estimated payments............................................. 32b 40,000.00 c 2011 refund applied for .................................................................................................... 32c d Bal. 32d e Tax deposited with form 7004.................................................................................................... 32e f Credit for tax paid on undistributed capital gain.................................................................................................... 32f g Credit for federal tax on fuels (attach form 4136)................................................................................................. 32g 32h 33 Estimated tax penalty....................................................................................................\ 33 34 Tax Due........................................................................................................ 34 35 Overpayment If line 32h is larger than the total of lines 31 and 33, enter amount overpaid............................................................................... 35 36 Enter amt of line 35 you want credited to 2012 estimated tax Credited Refunded 36
Tax Payments
Income
Tab: 1120-front (2)
File: 15bf038b617c4f9c397cb342cc631cb63c491785.xls
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Name:________________________ Class ________ Row:_________
Student ID Number
1120
1a 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 a 20 b 21 22 23 24 25 26 27 28 29
U.S. Corporation Income Tax Return
2011
Gross Receipts 600,000 b. Less: Returns Bal 1c 600,000 Cost of Goods Sold.................................................................................................... 2 Gross Profit.................................................................................................... 3 600,000 Dividends.................................................................................................... 4 10,000 Interest........................................................................................................ 5 Gross Rents....................................................................................................... 6 Gross royalties....................................................................................................7 Capital gain net income.................................................................................................... 8 Net gain or (loss) from Form 4797, Part II, Line 17.............................................................................................. 9 Other Income.................................................................................................... Total 10 Income.................................................................................................... 11 610,000 Compensation of officers.................................................................................................... 12 Salaries and Wages.................................................................................................... 13 300,000 Repairs and Maintenance.................................................................................................... 14 Bad debts.................................................................................................... 15 Rents............................................................................................................... 16 73,000 Taxes and licenses.................................................................................................... 17 39,000 Interest........................................................................................................... 18 Charitable contributions.................................................................................................... 16,900 19 Depreciation (attach form 4562).................................................................................................... 20 a 20,000 Less depreciation claimed on Schedule A.................................................................................................... 20 b 20c 20,000 Depletion........................................................................................................ 21 Advertising.................................................................................................... 22 Pension, profit-sharing, etc.................................................................................................... 23 Employee benefit plans.................................................................................................... 24 Domestic production activities deduction (attach Form 8903) ................................ 25 Other Deductions.................................................................................................... 26 9,000 Total Deductions.................................................................................................... 27 457,900 Taxable income before net operating loss and special deductions............................................................................ 28 152,100 Less: a. Net operating loss.................................................................................................... 29a b. Special deductions.................................................................................................... 7,000 29b 7,000 29c 30 Taxable income .................................................................................................... 30 145,100 31 Total Tax......................................................................................................... 31 39,839 2010 overpayment credited to 2011.................................................................................................... 32 32a b 2011 Estimated payments............................................. 32b 40,000 c 2011 refund applied for .................................................................................................... 32c d Bal. 32d 40,000 e Tax deposited with form 7004.................................................................................................... 32e f Credit for tax paid on undistributed capital gain.................................................................................................... 32f g Credit for federal tax on fuels (attach form 4136)................................................................................................. 32g 32h 40,000 33 Estimated tax penalty....................................................................................................\ 33 34 Tax Due........................................................................................................ 34 35 Overpayment If line 32h is larger than the total of lines 31 and 33, enter amount overpaid............................................................................... 35 161 36 Enter amt of line 35 you want credited to 2012 estimated tax Credited Refunded 36
Tax Payments
Income
Tab: Form 1120-Balance sheet
File: 15bf038b617c4f9c397cb342cc631cb63c491785.xls
Page 6 of 8 Page 4 (c) (d)
Form 1120 (2011)
Schedule L Balance Sheets 1 2a 2b 3 4 5 6 7 8 9 10a 10b 11a 11b 12 13a 13b 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Sample Corporation
(a) (b) Assets Cash .................................................................................... Trade notes and accounts receivable ........................... Less allowance for bad debts .......................................... Inventories................................................................................ U.S. govemment obligations......................................... Tax-exempt securities (see instructions) .................... Other current assets (attach schedule) (Savings).......... Loans to stockholders...................................................... Mortgage and real estate loans....................................... Other investments (attach schedule)........................... Buildings and other depreciable assets.......................... Less accumulated depreciation................................... Depletable Assets................................................ Less accumulated depletion........................................ Land (net of any amortization) .................................... Intangible assets (amortizable only)............................ Less accumulated amortization.................................. Other assets (attach schedule) .................................. Total Assets........................................................ Liabilities and Stockholders' Equity Accounts payable.............................................. Mortgages, notes, payable in less than 1 year............ Other current liabilities (attach schedule) .............. Loans from stockholders............................................ Mortgages, notes, payable in 1 year or more.............. Other liabilities (attach schedule)................... Capital stock: a Preferred stock....................................... b Common stock................................. Additional paid-in capital.......................................................... Adjustments to stockholders equity.......................................................... Retained eamings-Appropriated...................................... Retained eamings-Unappropriated .......................................... Less cost of treasury stock.................................................. $ Total liabilities and stockholders' equity ..................
$24,000 48,000 (7,000) 41,000
200,000
100,000 200,000 16,000 184,000
$549,000 73,000
400,000
400,000
-
76,000 $549,000
Note You are not required to complete Schedules M-1 and M-2 if the total assets on Line 15, Column (d) are less than $25,000
Schedule M-1
Reconciliation of Income (Loss) per Books with Income per Return
7 Income recorded on books this year not included on this return (itemize): 14,000.00 Tax-exempt interest. $
14,000
1 2 3 4
Net income (loss) per books..................................... $76,000 Federal income tax............................................. 40,000 Excess of capital losses over capital gains .................. 15,000 Income subject to tax not recorded on books................... this year (itemize):......................... ....................................
8 Deductions on this return not charged a. Depreciation ...... $ b. Contributions carryover $
against book income this year (itemize): 4,000
5 Expenses recorded on books this year not deducted on this retum (itemize): a Depreciation ................. 23,100 b Contributions ................ 9,000 c Travel and entertainment...
Bad Debts 7,000
4,000
6 Add lines 1 throuqh 5
Schedule M-2
39,100 9 Add lines 7 and 8 $170,100 10 Income (Line 28, page 1) - line 6 less line 9 $0 76,000 5 Distributions: a Cash........................................ b Stock ....................................... c Property.................................. 6 Other decreases (itemize): 7 Add lines 5 and 6.......................................... 8 Balance end of year (line 4 less line 7)
18,000 $152,100
Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L)
1 Balance at beginning of year................................... 2 Net income (loss) per books................................... 3 Other increases (itemize):
-
4
Add lines 1. 2. and 3..........................................
$76,000
$76,000
Tab: Form 1120-Balance sheet Large
File: 15bf038b617c4f9c397cb342cc631cb63c491785.xls
Page 7 of 8 Page 4
Form 1120 (2011)
Schedule L Balance Sheets
Sample Corporation
Assets
1 2a 2b 3 4 5 6 7 8 9 10a 10b 11a 11b 12 13a 13b 14 15
(a)
(b)
(c)
(d)
Cash .................................................................................... Trade notes and accounts receivable ........................... Less allowance for bad debts .......................................... Inventories................................................................................ U.S. govemment obligations......................................... Tax-exempt securities (see instructions) ....................
Other current assets (attach schedule) (Savings)..........
$24,000 48,000 (7,000) 41,000
200,000
Loans to stockholders...................................................... Mortgage and real estate loans....................................... Other investments (attach schedule)........................... Buildings and other depreciable assets.......................... Less accumulated depreciation................................... Depletable Assets................................................ Less accumulated depletion........................................ Land (net of any amortization) .................................... Intangible assets (amortizable only)............................ Less accumulated amortization.................................. Other assets (attach schedule) .................................. Total Assets........................................................
100,000 200,000 16,000 184,000
$549,000
Liabilities and Stockholders' Equity
16 17 18 19 20 21 22
Accounts payable..............................................
Mortgages, notes, bonds payable in less than 1 year............
$73,000
Other current liabilities (attach schedule) .............. Loans from stockholders............................................
Mortgages, notes, bonds payable in 1 year or more..............
23 24 25 26 27 28
Other liabilities (attach schedule)................... Capital stock: a Preferred stock....................................... b Common stock................................. 400,000 Additional paid-in capital.......................................................... Adjustments to stockholders equity.......................................................... Retained eamings-Appropriated...................................... Retained eamings-Unappropriated .......................................... Less cost of treasury stock.................................................. $ Total liabilities and stockholders' equity ..................
400,000
76,000
$549,000
Note You are not required to complete Schedules M-1 and M-2 if total assets on Line 15, Column (d) are less than $25,000
Tab: Schedule M
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Schedule M-1
1 2 3 4
Reconciliation of Income (Loss) per Books with Income per Return
7 Income recorded on books this year not included on this return (itemize):
$76,000 Net income (loss) per books.....................................
Federal income tax.............................................
Excess of capital losses over capital gains .................. Income subject to tax not recorded on books...................
40,000 15,000
Tax-exempt interest.
8
$14,000 14,000
.................................... this year (itemize):.........................
5
Deductions on this return not charged against book income this year (itemize):
Expenses recorded on books this year not deducted on this retum (itemize):
a b c
a.
Depreciation ......
$4,000
b. Contributions carryover $
Depreciation ................. Contributions ................ Travel and entertainment...
Bad Debts 23,100 9,000 7,000 39,100
9
4,000
Add lines 7 and 8
18,000 $152,100
6
Add lines 1 throuqh 5
$170,100 10 Income (Line 28, page 1) - line 6 less line 9
Schedule M-2
1 2 3
Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L)
$0 5
Balance at beginning of year...................................
Other increases (itemize):
Distributions: a Cash........................................ b Stock ....................................... c Property..................................
Net income (loss) per books................................... 76,000
6
Other decreases (itemize): Add lines 5 and 6..........................................
Balance at end of year (line 4 less line 7) $0
7
4
Add lines 1. 2. and 3..........................................
$76,000
8
$76,000