S CORPORATION TAX RETURN PROBLEM-Salt Source Inc.’s (SSI) 2010 Form 1120S. Also complete Kim Bentley

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Description

S CORPORATION TAX RETURN PROBLEM

Required:

• Using the information provided below, complete Salt Source Inc.’s (SSI) 2010

Form 1120S. Also complete Kim Bentley’s Schedule K-1.

• Form 4562 for depreciation is not required. Include the amount of tax

depreciation given in the problem on the appropriate line on the first page of

Form 1120S.

• If any information is missing, use reasonable assumptions to fill in

the gaps.

• The forms, schedules, and instructions can be found at the IRS Web site

(www.irs.gov). The instructions can be helpful in completing the forms.

Facts:

Salt Source Inc. (SSI) was formed as a corporation on January 5, 2007, by its two

owners Kim Bentley and James Owens. SSI immediately elected to be taxed as an

S corporation for federal income tax purposes. SSI sells salt to retailers throughout

the Rocky Mountain region. Kim owns 70 percent of the SSI common stock (the

only class of stock outstanding) and James owns 30 percent.

• SSI is located at 4200 West 400 North, Salt Lake City, UT 84116.

• SSI’s Employer Identification Number is XXXXX

• SSI’s business activity is wholesale sales. Its business activity code is 424990.

• Both shareholders work as employees of the corporation.

• Kim is the president of SSI (Social Security numberNNN-NN-NNNN. Kim’s

address is 1842 East 8400 South, Sandy, UT 84094.

• James is the vice president of SSI (Social Security numberNNN-NN-NNNN.

James’s address is 2002 East 8145 South, Sandy, UT 84094.

• SSI uses the accrual method of accounting and has a calendar year-end.

12/31/10 12/31/09

Liabilities and Capital

Accounts payable $ 49,000 $ 45,500

Notes payable 50,000 0

Mortgage payable 63,000 67,500

Capital: XXXXX XXXXX 94,553 82,040

Steve Stillwell 217,542 176,679

TOTALS $474,095 $371,719

C-18

The following is SSI’s 2010 income statement:

SSI

Income Statement

For year ending December 31, 2010

Revenue from sales $980,000

Sales returns and allowances (10,000)

Cost of goods sold (110,000)

Gross profit from operations

$860,000

Other income:

Dividend income $ 15,000

Interest income 5,000

Gross income $880,000

Expenses:

Compensation ($600,000)

Depreciation (10,000)

Bad debt expense (14,000)

Meals and entertainment (2,000)

Maintenance (8,000)

Business interest (1,000)

Property taxes (7,000)

Charitable contributions (10,000)

Other taxes (30,000)

Rent (28,000)

Advertising (14,000)

Professional services (11,000)

Employee benefits (12,000)

Supplies (3,000)

Other expenses (21,000)

Total expenses (771,000)

Net income $ 109,000

Notes:

1. SSI’s purchases during 2010 were $115,000. It values its inventory based on cost

using the FIFO inventory cost flow method. Assume the rules of §263A do not

apply to SSI.

2. Of the $5,000 interest income, $2,000 was from a West Jordan city bond used to

fund public activities (issued in 2007) and $3,000 was from a money market

account.

3. SSI’s dividend income comes from publicly traded stocks that SSI has owned

for two years.

4. SSI’s compensation is as follows:

• Kim $120,000

• James $80,000

• Other $400,000.

5. SSI wrote off $6,000 in accounts receivable as uncollectible during the year.

6. SSI’s regular tax depreciation was $17,000. AMT depreciation was $13,000,

Appendix C

C-19

7. SSI distributed $60,000 to its shareholders.

8. SSI is not required to compute the amount in its accumulated adjustments

account.

The following are SSI’s book balance sheets as of January 1, 2010, and December 31,

2010.

2010

January 1 December 31

Assets

Cash $ 90,000 $143,000

Accounts receivable 300,000 310,000

Allowance for doubtful accounts (60,000) (68,000)

Inventory 45,000 50,000

State and local bonds 38,000 38,000

Investments in stock 82,000 82,000

Fixed assets 100,000 100,000

Accumulated depreciation (20,000) (30,000)

Other assets 20,000 21,000

Total assets $595,000 $646,000

Liabilities and Shareholders’ Equity

Accounts payable 60,000 55,000

Other current liabilities 5,000 8,000

Other liabilities 10,000 14,000

Capital stock 200,000 200,000

Retained earnings 320,000 369,000

Total liabilities and shareholders’ equity $595,000 $646,000

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