XYZ, Inc. is a calendar-year corporation that began business on January 1, 2017. For 2018, it reported the following information in its current year audited income statement. Notes with important tax information are provided below.
Reconcile book income to taxable income on worksheet (below).
Notes:
1. XYZ owns 10% of the outstanding Home Corp. (HC) stock. Home Corp. reported $2,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method and it recorded its pro rata share of HC’s earnings for the year. HC also distributed a $100,000 dividend to XYZ.
2. Of the $20,000 interest income, $5,000 was from Ford Motor, $7,000 was from a Toyota, $6,000 was from a Town of Presque Isle municipal bond, and the remaining $2,000 was from an investment in a CD (certificate of deposit).
3. Life insurance proceeds from death of the CFO.
4. This includes total officer compensation of $3,500,000. The CEO was paid $1,250,000 for salary in 2018 (no one officer received more than $1,000,000 compensation).
5. $2,000 is the portion of interest paid on a loan taken out to obtain a tax exempt municipal bond from the City of Presque Isle.
6. XYZ actually wrote off $48,000 of its accounts receivable as uncollectible.
7. Tax depreciation was $700,000.
8. In the current year, XYZ made $23,500 in actual payments on warranties it provided to customers.
9. XYZ made $750,000 of cash contributions to qualified charities during the year.
10. On January 1 of this year XYZ acquired the assets of another business. In the process it acquired $200,000 of goodwill. At the end of the year, XYZ wrote off $10,000 of the goodwill as impaired.
11. XYZ expensed all of its organizational expenditures for book purposes. It expensed the maximum amount of organizational expenditures allowed for tax purposes.
12. The other expenses do not contain any items with book-tax differences.
13. XYZ received rental income payments in 2018 that relates to 2019. They have not earned the amount as of year-end and was not recorded in the books. The total amount received was $21,500
XYZ, Inc. is a calendar-year corporation that began business on January 1, 2017. For 2018, it reported the following information in its current year audited income statement. Notes with important tax information are provided below.
Reconcile book income to taxable income on worksheet (below).
Notes:
1. XYZ owns 10% of the outstanding Home Corp. (HC) stock. Home Corp. reported $2,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method and it recorded its pro rata share of HC’s earnings for the year. HC also distributed a $100,000 dividend to XYZ.
2. Of the $20,000 interest income, $5,000 was from Ford Motor, $7,000 was from a Toyota, $6,000 was from a Town of Presque Isle municipal bond, and the remaining $2,000 was from an investment in a CD (certificate of deposit).
3. Life insurance proceeds from death of the CFO.
4. This includes total officer compensation of $3,500,000. The CEO was paid $1,250,000 for salary in 2018 (no one officer received more than $1,000,000 compensation).
5. $2,000 is the portion of interest paid on a loan taken out to obtain a tax exempt municipal bond from the City of Presque Isle.
6. XYZ actually wrote off $48,000 of its accounts receivable as uncollectible.
7. Tax depreciation was $700,000.
8. In the current year, XYZ made $23,500 in actual payments on warranties it provided to customers.
9. XYZ made $750,000 of cash contributions to qualified charities during the year.
10. On January 1 of this year XYZ acquired the assets of another business. In the process it acquired $200,000 of goodwill. At the end of the year, XYZ wrote off $10,000 of the goodwill as impaired.
11. XYZ expensed all of its organizational expenditures for book purposes. It expensed the maximum amount of organizational expenditures allowed for tax purposes.
12. The other expenses do not contain any items with book-tax differences.
13. XYZ received rental income payments in 2018 that relates to 2019. They have not earned the amount as of year-end and was not recorded in the books. The total amount received was $21,500
Related questions
Part 2: Schedule M1 (CT1) and M2 (CT2) For RockyMountain Equipment Corporation Form 1120-F
The Rocky Mountain Equipment Corporation, a ColoradoCorporation, was formed by two Colorado State University businessschool graduates. The Rocky Mountain Equipment Corporationincorporated on October 20, 1974. The main line of business isselling recreational equipment to outdoor enthusiasts. Starting intheir parentsâ garage, they have grown the corporation to amultimillion dollar business.
To comply with accounting requirements, the company uses anaccrual method of accounting. Its accumulated earnings and profitsas of December 31, 2016, were $1,200. It made cash distributionsduring its 2016 calendar tax year of $140,089. This consisted of$85,089 to preferred shareholders and $55,000 to commonshareholders. The entire distribution to preferred shareholders isa taxable dividend. The $27,500 distribution on March 15, 2016, tocommon shareholders is a taxable dividend to extent of $27,318(99.33%), and the $27,500 distribution on September 15, 2016, tocommon shareholders is a taxable dividend to the extent of $26,118(94.97%).
The following profit and loss account appeared in the books ofthe Rocky Mountain Equipment Corporation for calendar year 2016. Itis required to file Form 1120 and completes Form 1120-F (M-1 andM-2).
Account | Debit | Credit | |||
Gross sales | $1,840,000 | ||||
Sales returns and allowances | $20,000 | ||||
Cost of goods sold | 1,520,000 | ||||
Interest income from: | |||||
Banks | $10,000 | ||||
Tax-exempt state bonds | 5,000 | 15,000 | |||
Proceeds from life insurance (death of corporate officer) | 6,000 | ||||
Bad debt recoveries (no tax deduction claimed) | 3,500 | ||||
Insurance premiums on lives of corporate officers (corporationis beneficiary of policies) | 9,500 | ||||
Compensation of officers | 40,000 | ||||
Salaries and wages | 28,000 | ||||
Repairs | 800 | ||||
Taxes | 10,000 | ||||
Contributions: | |||||
Deductible | $23,000 | ||||
Other | 500 | 23,500 | |||
Interest paid (loan to purchase tax-exempt bonds) | 850 | ||||
Depreciation | 5,200 | ||||
Loss on securities | 3,600 | ||||
Net income per books after federal income tax | 140,825 | ||||
Federal income tax accrued for 2016 | 62,225 | ||||
Total | $1,864,500 | $1,864,500 | |||
The corporation analyzed the retained earnings and thefollowing items appeared in this account on its books. | |||||
Item | Debit | Credit | |||
Balance, January 1 | $225,000 | ||||
Net profit (before federal income tax) | 203,050 | ||||
Reserve for contingencies | $10,000 | ||||
Income tax accrued for the year | 62,225 | ||||
Dividends paid during the year | 140,089 | ||||
Refund of 1995 income tax | 18,000 | ||||
Balance, December 31 | 233,736 | ||||
Total | $446,050 | $446,050 | |||
The following items appear on page 1 of Form1120. | |||||
Gross sales ($1,840,000 less returns and allowances of$20,000) | $1,820,000 | ||||
Cost of goods sold | 1,520,000 | ||||
Gross profit from sales | $300,000 | ||||
Interest income | 10,000 | ||||
Total income | $310,000 | ||||
Deductions: | |||||
Compensation of officers | $40,000 | ||||
Salaries and wages | 28,000 | ||||
Repairs | 800 | ||||
Taxes | 10,000 | ||||
Contributions (maximum allowable) | 22,500 | ||||
Depreciation | 6,200 | ||||
Total deductions | 107,500 | ||||
Taxable income | $202,500 | ||||
Please prepare Schedule M-1 for Rocky Mountain EquipmentCorporation using the financial information and the Form 1120 lineitems provided above.
Please prepare Schedule M-2 for Rocky Mountain EquipmentCorporation using the retained earning information provided. Toaccurately calculate and support the ending balance, pleasecomplete a Retained Earnings Reconciliation Table.
