1. On November 1, 2005, Janet Morton and Kim Wong formed Pet Kingdom, Inc., to sell pets and pet supplies. Pertinent information regarding Pet Kingdom is summarized as follows:
• Pet Kingdom’s business address is 1010 Northwest Parkway, Dallas, TX 75225; its telephone number is (214) 555-2211; and its e-mail address is [email protected]
• The employer identification number is 11-1111111, and the principal business activity code is 453910.
• Janet and Kim each own 50% of the common stock; Janet is president and Kim is vice president of the company. No other class of stock is authorized.
• Both Janet and Kim are full-time employees of Pet Kingdom. Janet’s Social Security number is 123-45-6789, and Kim’s Social Security number is 987-65-4321.
• Pet Kingdom is an accrual method, calendar year taxpayer. Inventories are determined using FIFO and the lower of cost or market method. Pet Kingdom uses the straight-line method of depreciation for book purposes and accelerated depreciation (MACRS) for tax purposes.
• During 2015, the corporation distributed cash dividends of $250,000.
Pet Kingdom’s financial statements for 2015 follow.
Income Statement
Income
Gross sales $5,750,000
Sales returns and allowances (200,000)
Net sales $5,550,000
Cost of goods sold (2,300,000)
Gross profit $3,250,000
Dividends received from stock investments in less-than- 20%-owned U.S. corporations 43,750
Interest income:
State bonds $15,000
Certificates of deposit 20,000 35,000
Total income $3,328,750 (continued)
Expenses
Salaries—officers:
Janet Morton $262,500
Kim Wong 262,500 $525,000
Salaries—clerical and sales 725,000
Taxes (state, local, and payroll) 238,000
Repairs and maintenance 140,000
Interest expense:
Loan to purchase state bonds $ 9,000
Other business loans 207,000 216,000
Advertising 58,000
Rental expense 109,000
Depreciation* 106,000
Charitable contributions 38,000
Employee benefit programs 60,000
Premiums on term life insurance policies on lives of Janet Morton and Kim
Wong; Pet Kingdom is the designated beneficiary 40,000
Total expenses (2,255,000)
Net income before taxes $1,073,750
Federal income tax (356,023)
Net income per books $ 717,727 * Depreciation for tax purposes is $136,000. You are not provided enough detailed data to complete a Form
4562 (depreciation). If you solve this problem using H&R BLOCK Tax Software, enter the amount of depreciation on line 20 of Form 1120.
Balance Sheet
Assets January 1, 2015 December 31, 2015
Cash $ 1,200,000 $ 1,037,750
Trade notes and accounts receivable 2,062,500 2,147,000
Inventories 2,750,000 3,030,000
Stock investment 1,125,000 1,125,000
State bonds 375,000 375,000
Certificates of deposit 400,000 400,000
Prepaid Federal tax –0– 3,977
Buildings and other depreciable assets 5,455,000 5,455,000
Accumulated depreciation (606,000) (712,000)
Land 812,500 812,500
Other assets 140,000 128,500
Total assets $13,714,000 $13,802,727
Liabilities and Equity January 1, 2015 December 31, 2015
Accounts payable $ 2,284,000 $ 1,975,000
Other current liabilities 175,000 155,000
Mortgages 4,625,000 4,575,000
Capital stock 2,500,000 2,500,000
Retained earnings 4,130,000 4,597,727
Total liabilities and equity $13,714,000 $13,802,727
During 2015, Pet Kingdom made estimated tax payments of $90,000 each quarter to the IRS. Prepare a Form 1120 for Pet Kingdom for tax year 2015.
