As the newest member on the corporate tax department team the senior partner assigns you to prepare corporate tax returns for Mikes Sporting Goods Inc.
Mikes Sporting Goods Inc. is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC all of whom were state champions in various sports. Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row. Mike won the state championship as a sprinter all four years of college.
Starting the company was Mikes idea he owns the largest percentage of stock and is the only owner who works in the business. The other three investors brought money to the table but never planned on working in the sporting goods store. Therefore no one questioned Mike when he suggested naming the corporation Mikes Sporting Goods Inc. In addition Mike has always had a strong desire to be known as the big guy on campus even after graduation.
As the old saying goes Location location location. Luckily Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses. After showing the location to the other investors everyone agreed it would attract their target market of young athletic enthusiasts. As corporate officers Mike and Juan signed a ten-year lease that required $9200 per year in rent.
The building was built just a few years ago so minimal expense was projected for maintenance and repairs. In 20Y5 Mike kept repairs expense down to $800 which really pleased Juan Elroy and Scott.
Corporate investments
During 20Y5 Mikes Sporting Goods Inc. received the following investment incomes:
Interest from its own Accounts Receivables = $1500
Interest from corporate bonds = $4000
Interest from tax-exempt state bonds = $5000
Dividends from various U.S. corporations = $10000
o Mikes Sporting Goods Inc. owns 20% of the stock of one corporation
Since Mikes Sporting Goods Inc. did not have a net operating loss its only entry on line 29 is the dividends-received deduction of $8000 from Schedule C page 2.
Year-end 20Y5 includes a $3600 capital losses from the sale of securities.
Revenue from Sales
The corporation which uses an accrual basis of accounting on a calendar year brought in $2910000 in gross sales in 20Y5. Just less than 1% of gross sales were returned thus bringing net sales to $2890000. Thanks to Mikes purchasing savvy cost of goods sold was $2050000 which is less than the industry standard of 80% of sales.
Other Expenses:
While the stockholders had intended on spending more on advertising Mike only spent $8700 and most of it was in Website development.
Bad debt expense
The corporation uses the specific account write off method for uncollectible accounts receivable. A total of $1600 in accounts receivable were written off in 20Y5.
Charitable contributions
During the year Mikes Sporting Goods Inc. contributed $11400 to the UMUC Traveling Athletes Fund and $12600 to the UMUC Athletic Scholarship Fund.
On Line 8(a) of the Schedule M of the 1120 Mikes Sporting Goods Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation’s books.
Total depreciation from Form 4562 (not illustrated) is $17600. $12400 is included as cost of goods sold in Line 5 of the Form 1125-A. Enter the balance of $5200 on line 20. Book Depreciation is $15980.
Interest expense: Mikes Sporting Goods Inc. incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up. Elroy is a securities broker with a national brokerage firm therefore he handles all corporate investments. In 20Y5 the corporation accrued $27200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds.
When the corporation was first formed the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow. Thus they agreed to pay Mike $55000 per year since he will manage the store and $5000 per year to the other stockholders. Thereby total officers salaries will be $70000 per year for the first five years. Hint: use Schedule E.
Since Mike will be handling the ordering inventory management and other administrative tasks all employees will be in sales. Given the nature of sporting goods stores everyone agreed the staff should be college students currently attending UMUC. Their goal was to keep wages below $50000 per year. In 20Y5 Mike managed to keep total wages at $44000.
All other expenses All other expenses of operating Mikes Sporting Goods Inc. totals $78300. These expenses include legal fees office expenses and sales commissions. Attach a schedule that itemizes these expenses to the return.
Taxes and credits
At December 31 20Y5 the corporation had $55387 in accrued federal income taxes.
Mikes Sporting Goods Inc. made four estimated tax payments totaling $69711 as follows:
$17280 on 4/15/20Y5
$17280 on 6/15/20Y5
$17280 on 9/15/20Y5
$17871 on 1/15/20Y6
See the cancelled checks in Appendix F.
Tax Credits:
The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs. Given the high unemployment rate of college students Mikes Sporting Goods Inc. is eligible for a $6000 work opportunity credit. Hint: use Form 5884. The credit will then carry over to the Schedule J of the 1120.
Reconciling Book to Return:
Mikes Sporting Goods Inc. has the following non-deductible expenses on its Income Statement Per Books:
Premiums paid on term life insurance on corporate officers $9500
Interest paid to purchase tax-exempt state bonds 850
Nondeductible contributions 500
Reduction of salaries by work opportunity credit 6000
Total $16850
Deductible state and local taxes (not federal income tax) totaled $15000
If Mikes Sporting Goods Inc. owes income tax the corporation will mail a check; if otherwise credit any overpayment to next years estimated taxes.
III. Steps to Completion:
Prepare IRS Form 1120
1. Prepare Schedules M-1: Reconciliation of Income (Loss) per Books with Income per Return using financial data in the Appendices. 2. Prepare Schedule M-2: Analysis of Unappropriated Retained Earnings per Books using financial data in the Appendices.
IV. Deliverables:
The following forms and schedules combined as a single PDF document are required:
! Form 1120 ! Form 4562: Depreciation and Amortization ! Schedule C: Total Special Deductions ! Schedule D: Net Long-Term Capital Gains or Losses ! Schedule J: Total Tax ! Schedule J: Total Payments and Credits ! Schedule K: Accuracy ! Schedule L: End of Tax Year: Total Liabilities and Stockholders Equity ! Form 8949: Totals for Proceeds Basis & Gain/Loss ! Form 1125-A: Total for Cost of Goods Sold ! Form 3800: General Business Credit: Credit Allowed for the Current Year ! M-1 Income ! M-2 Balance at End of Year ! In addition each student must separately submit their Group Contribution Report in their Assignment folder.
Appendices: Table of Contents
Appendix A: Basic corporate information
Appendix B: List of select Accounts and Balances per Book o (Financial basis NOT tax basis)
Appendix C: Income Statement per Books o (Financial basis not tax)
Appendix D: Comparative Balance Sheet per Books o (Financial basis not tax)
Appendix E: General Ledger Retained Earnings account in T-account format.
Appendix F: Cancelled checks to the Internal Revenue Service for estimated quarterly tax payments
APPENDIX A: Basic corporate information
Corporate Name Mikes Sporting Goods Inc. Corporate Address 422 Bruce Lane Annapolis MD 21401
Federal Tax ID 52-9746858 Corporate officers: President/CEO Michael S. Duke Vice President Juan Delaross Treasurer Elroy Mulcane Secretary Scott Barnett
APPENDIX B: List of select Accounts and Balances per Book (financial-basis not tax basis). Account balances may or may not be reported on Form 1120. Hint: You will need these items to prepare Schedule M of the 1120.
Account Account Balance Advertising 8700 Bad debts 1600 Charitable Contributions to Not-for-Profit organizations 24000 Charitable Contributions to political campaigns 500 Compensation of officers 70000 Cost of goods sold 2050000 Depreciation–indirect 3580 Dividends received 10000 Federal income tax accrued 55387 Interest expense on note to buy tax-exempt state bonds 850 Interest expense on note to buy corporate bonds 27200 Interest income on tax exempt state bonds 5000 Interest income on taxable corporate bonds 5500 Loss on securities 3600 Maintenance and Repairs 800 Net income per books after tax 517783 Other operating expenses 78300 Premiums on life insurance 9500 Proceeds from life insurance 9500 Rental expense 9200 Salaries and wages–indirect 44000 Sales – gross 2910000 Sales returns and allowances 20000 State and Local Taxes 15000
APPENDIX C: Income Statement per Book (financial not tax)
Mikes Sporting Goods Inc. Income Statement (per Books) Year ending 20Y5 Revenue: Gross sales $ 2910000 Less: Returns & allowances 20000 Net sales 2890000 Cost of goods sold 2050000 Gross Margin 840000 Operating expenses: Advertising 8700 Bad debt 1600 Charitable contributions: Deductible 24000 Non-deductible 500 24500 Depreciation 3580 Equipment rental 9200 Life insurance 9500 Maintenance & repairs 800 Officers compensation 70000 Salaries and wages 44000 Total operating expenses 171880 Operating Income 668120 Other revenue and gains: Dividend income 10000 Interest income: Maryland bonds 5000 Interest income: All other bonds 5500 Proceeds from life insurance 9500 Total other revenue and gains 30000 Other expenses and losses: Accrued federal income taxes 55387 Other operating expenses 78300 Loss on investments 3600 Total other expenses and losses 137287 Total income before interest and taxes 560833 Interest expense on note to purchase taxexempt bonds 850 Interest expense on all other notes 27200 28050 Income before tax 532783 Less: State & Local Income tax 15000 Net income per books after tax 517783
APPENDIX D: Comparative Balance Sheet per Books (financial not tax)
Mikes Sporting Goods Inc. Balance Sheet per Books December 31 20Y4 and 20Y5
Year Ending 20Y4 Year ending 20Y5 Assets Cash 114700 329564 Accounts receivable (net) 98400 235001 Inventory 426000 495479 Tax-exempt securities 100000 120000 Other current assets 26300 17266 Other investments 100000 80000 Buildings 272400 296700 Accumulated depreciation 88300 184100 104280 192420 Land 20000 20000 Other assets 14800 19300 Total assets 1084300 1509030 Liabilities & Stockholders Equity Accounts payable 428500 334834 Notes payable (short term) 4300 4300 Other current liabilities 6800 7400 Notes payable (long term) 176700 264100 Stockholders Equity Common stock 200000 200000 Retained earnings: Appropriated 30000 40000 Retained earnings: Unappropriated 238000 658396 Total liabilities & Stockholders equity 1084300 1509.030
APPENDIX E: General ledger Retained Earnings account in T-account format
General Ledger Retained Earnings Account Explanations: Debits Credits Explanations: Contingencies 10000 238000 Beg balance Accrued income tax 55387 532783 Net Income before tax Dividends paid 65000 18000 Income tax refund Ending balance 658396
APPENDIX F: Canceled checks

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