Problem 3—C Corporation (FORM 1120)
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 petkingdom@pki.com.
- 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 2018, the corporation distributed cash dividends of $306,495.
Pet Kingdom’s financial statements for 2019 are shown below.
Income Statement
Income
Gross Sales $4,600,000
Sales returns and allowances (160,000)
Net Sales $4,440,000
Cost of goods sold (1,840,000)
Gross Profit $2,600,000
Dividends received from stock Investments
in less-than-20%-owned U.S. corporations 35,000
Interest Income:
State bonds $12,000
Certificates of deposit 16,000 28,000
Total income $2,663,000
Expenses
Salaries-officers
Janet Morton $210,000
Kim Wong 210,000 $420,000
Salaries-clerical and sales 580,000
Taxes (state, local, and payroll) 190,000
Repairs and maintenance 112,000
Interest Expense:
Loan to purchase state bonds $ 7,000
Other business loans 174,000 181,000
Advertising 46,000
Rental expense 86,000
Depreciation* 80,000
Charitable contributions 30,000
Employee benefit programs 48,000
Premiums on term life insurance policies
on lives of Janet and Kim; Pet Kingdom
is the designated beneficiary 32,000
Total expenses (1,805,000)
Net Income before taxes $858,000
Federal income tax (175,875)
Net income per books $682,125
*Depreciation for tax purposes is $110,000. 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, 2019 December 31, 2019
Cash $ 960,000 $ 680,000
Trade notes and accounts receivable 1,650,000 1,838,000
Inventories 2,200,000 2,424,000
Stock Investment 900,000 900,000
State bonds 300,000 300,000
Certificates of deposit 350,000 350,000
Prepaid Federal Tax -0- 3,630
Buildings and other depreciable assets 4,365,000 4,365,000
Accumulated depreciation (485,000) (565,000)
Land 650,000 650,000
Other assets 112,000 102,800
Total assets $11,002,000 $11,048,430
Liabilities and Equity January 1,2019 December 31, 2019
Accounts Payable $ 1,850,000 $ 1,579,800
Other current liabilities 142,000 123,000
Mortgages 3,700,000 3,660,000
Capital stock 2,000,000 2,000,000
Retained earnings 3,310,000 3,685,630
Total liabilities and equity $11,002,000 $ 11,048,430
During 2018, Pet Kingdom made estimated tax payments of $44,876.25 each quarter to the IRS. Prepare a Form 1120 for Pet Kingdom for tax year 2019. Suggested software: H&R BLOCK Tax Software.
