ACC 312 Study Guide - Midterm Guide: Gross Margin, Current Liability
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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.