Question

Note: This problem is for the 2018 tax year.

On November 1, 2008, 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 2018, the corporation distributed cash dividends of $250,000.

Pet Kingdom's financial statements for 2018 are shown below.

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 Expenses Salaries—officers     Janet Morton $262,500     Kim Won 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 (221,734) Net income per books $  852,016

*Depreciation for tax purposes is $136,000.

Balance Sheet Assets January 1, 2018 December 31, 2018 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-     2,266       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, 2018 December 31, 2018 Accounts payable $  2,284,000     $  1,840,711       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     4,732,016           Total liabilities and equity $13,714,000     $13,802,727

During 2018, Pet Kingdom made estimated tax payments of $56,000 each quarter to the IRS.

If an answer is zero, enter "0".

Enter all amounts as positive numbers.

If required, round final answers to the nearest dollar.

Please help with Schedule M-1, M-2, M-3

Answer 1