Knoxville Musical Sales, Inc. is located at 5500 Kingston Pike, Knoxville, TN 37919. Thecorporation uses the calendar year and accrual basis for both book and tax purposes. It isengaged in the sale of musical instruments with an employer identification number (EIN)of 75-2012010. The company incorporated on December 31, 2006, and began businesson January 2, 2007. Table C:3-4 contains balance sheet information at January 1, 2010,and December 31, 2010. Table C:3-5 presents an income statement for 2010. Theseschedules are presented on a book basis. Other information follows the tables.
Knoxville Musical Sales, Inc.â€”Book Balance Sheet Information
January 1, 2010 December 31, 2010
Account Debit Credit Debit Credit
Cash $ 108,439 $ 510,574
Accounts receivable 429,570 499,500
Allowance for doubtful accounts $ 36,513 $ 42,458
Inventory 2,312,500 3,237,500
Investment in corporate stock 150,000 46,000
Investment in municipal bonds 30,000 30,000
Cash surrender value of insurance policy 40,000 50,000
Land 390,000 390,000
Buildings 1,250,000 1,250,000
Accumulated depreciationâ€”Buildings 62,500 87,500
Equipment 928,000 2,840,000
Accumulated depreciationâ€”Equipment 154,667 259,333
Trucks 210,000 210,000
Accumulated depreciationâ€”Trucks 63,000 105,000
Deferred tax asset 15,815 14,436
Accounts payable 300,000 270,000
Notes payable (short-term) 500,000 400,000
Accrued payroll taxes 13,875 17,344
Accrued state income taxes 8,325 13,875
Accrued federal income taxes 79,541
Bonds payable (long-term) 1,800,000 2,500,000
Deferred tax liability 150,444 560,020
Capital stockâ€”Common 925,000 925,000
Totals $5,864,324 $5,864,324 $9,078,010 $9,078,010
Knoxville Musical Sales, Inc.â€”Book Income Statement 2010
Sales $ 9,250,000
Net sales $ 9,018,750
Beginning inventory $2,312,500
Ending inventory )
Cost of goods sold )
Gross profit $ 4,856,250
Amortization $ â€“0â€“
General ins. 50,875
Net premium-Off. life ins. 41,625
Officerâ€™s compensation 601,250
Other salaries 370,000
Legal and accounting fees 46,250
Charitable contributions 27,750
Payroll taxes 57,813
Interest expense 194,250
Bad debt expense
Total expenses (1,792,264)
Gain on sale of equipment 91,600
Interest on municipal bonds 4,625
Net gain on stock sales 35,000
Net income before income taxes $ 3,206,311
Federal income tax expense (1,076,497)
State income tax expense )
Net income $ 2,060,439
Compensation of Officers (Schedule E):
Mary Travis 345-82-7091 100% 50% $271,250
John Willis 783-97-9105 100% 25% 165,000
Chris Parker 465-34-2245 100% 25%
For tax purposes, the corporation uses the direct writeoff
method of deducting bad debts.
For book purposes, the corporation uses an allowance for
doubtful accounts. During 2010,
the corporation charged $37,000 to the allowance account,
such amount representing actual
writeoffs for 2010.
Additional Information (Schedule K):
1 b Accrual 6-7 No
2 a 451140 8 Do not check box
b Retail sales 9 Fill in the correct amount
c Musical instruments 10 3
3 No 11 Do not check box
4 a No 12 Not applicable
b Yes; omit Schedule G 13 No
5 a No
The corporation incurred $9,500 of organizational
expenditures on January 2, 2007.
For book purposes, the corporation expensed the entire
expenditure. For tax purposes,
the corporation elected under Sec. 248 to deduct $5,000 in
2007 and amortize the
remaining $4,500 amount over 180 months, with a full monthâ€™s
amortization taken for
January 2007. The corporation reports this amortization in
Part VI of Form 4562 and
includes it in â€œOther Deductionsâ€ on Form 1120, Line 26.
Capital Gains and Losses:
The corporation sold 100 shares of PDQ Corp. common stock on October 7, 2010, for
$89,000. The corporation acquired the stock on December 15, 2009, for $48,000. The
corporation also sold 75 shares of JSB Corp. common stock on June 17, 2010, for $50,000.
The corporation acquired this stock on September 18, 2008, for $56,000. The corporation
has a $10,000 capital loss carryover from 2009.
Fixed assets and
book purposes: the corporation uses straight- line depreciation over the useful
lives of assets as follows: Store building, 50 years: Equipment, 15 years(old)
and ten years(new) and trucks, five years. The corporation takes a half-years
depreciation in the year of acquisition and the year of disposition and assumes
no salvage value. the book financial statements reflect these calculations.
tax purposes: All assets are MACRS property as follows: store building , 39
yearnonrezidential real property: equipment, seven year property: and trucks
five year property, and trucks , five year property.
corporation acquired the store building for 1.25 $milion and placed it in
service on january 2, 2007. The corporation acquired two pieces of equipment
for 288,000 Equipment 1 and 640,000Equipment2. and placed them in service on
january 2,2007. The corporation acquired the trucks for $210,000 and placed
them in service on July 18,2008. The corporation did not make the expensing
election under sec. 179 on any property acquire before 2009. Accumulated tax
depreciation through December 31, 2009, on these properties is as follows:
September 1,2010. the corporation sold for $322,000 Equipment 1 that originally
cost $288,000 on January 2,2007. the corporation had no sec.1231 losses from
prior years. In a separate transaction on September 2, 2010, the corporation
acquired and placed in service a piece of equipment costing 2.2 million. $These
two transactions do not qualify as a like king exchange under reg. sec. 1.1031
(K)-1(a). The new equipment is seven year property. The corp. made the sec179
expensing election with regard to the new equipment and claimed bonus
depreciation. Where applicable, use published IRS depreciation tables to
compute 2010 depreciation( reproduced in Appendix C of this text).
corporation’s activities do not qualify for the US production activities
the AMT and accumulated earnings tax.
received dividends ( see income statement) from taxable, domestic corporations,
the stock of which Knoxville Musical Sales, Inc. owns less than 20 %.
corporation paid 92,500 $ in cash dividents to its shareholders during the year
and charged the payment directly to retained earnings.
state income tax in is the exact amount of such taxes incurred during the year.
corporation is not entitled any credits.
THE 2010 CORPORATE TAX RETURN FOR KNOXVILLE MUSICAL SALES,INC. ALONGWITH ANY
NECESARY SUPPORTING SCHEDULES.
schedule M3 and schedule B as well as such