Question

Debbie Rader, William Allen, and Jeffrey Townsend are owners in “RAT, Inc.” – a “C” Corporation engaged in pest control services. Pertinent information regarding RAT, Inc. is summarized below.

-Social security numbers are as follows; Debbie – 623-98-0123; William – 410-63-4297; Jeffrey – 855-21-1750. Debbie is the President of the company.

-The address of the company is 1421 Ocean View Drive, Anderson, ME 04842.

-The company was formed and began operations on January 1, 2013.

-The business code is 541990.

-The federal identification number is 67-4598288

-The corporation uses the cash method of accounting and the calendar year for reporting.

-The corporation recorded $14,002 depreciation for book purposes but $21,602 for income tax purposes (using MACRS methodology). Assume none of the depreciation creates a tax preference or adjustment for AMT purposes.

-All loan borrowings were used exclusively for acquisition of equipment, consequently, all interest is considered business interest.

-The owners original capital contributions are as follows: Rader - $100,000 for 50% ownership; Allen - $60,000 for 30% ownership; and Townsend $40,000 for a 20% ownership in the stock of the business. No capital contributions occurred in 2017.

-Salary payments were made to the owners as follows: Rader - $90,000, Allen and Townsend - $30,000 EACH.

-Each of the owners were paid a dividend as follows: Rader - $60,000; Allen - $36,000; Townsend - $24,000. There were no distributions of any non-cash property.

-The equipment loan is nonrecourse debt to the shareholders. .

-None of the stockholders sold any portion of their ownership interests during the year.

-The company has no available tax credits and is not subject to AMT. The company’s operations are entirely restricted to the local geographic area in Maine. All shareholders are U.S. citizens. The company had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or foreign corporations. The company’s stock is not publicly traded.

-The company is not subject to the consolidated audit procedures. The company files its federal tax return in Cincinnati, Ohio.

-Debbie Rader lives at 415 Knight Ct., Anderson, ME 04842, William Allen lives at 692 Radford Dr., Anderson, ME 04842; and Jeffrey Townsend lives at 342 Coastal Rd., Anderson, ME 04842.

-No ownership changes occurred during the year.

-The company’s marketable securities represent small investments (<1%) in a number of publicly traded companies and mutual funds. It sold its holdings of XYZ common stock (carried as Marketable Securities on the balance sheet) on July 20 for $15,000. The corporation purchased this investment several years ago for $25,000.

The current income statement for the corporation reflected book net income of $98,100 AFTER book depreciation has been taken on the equipment and the loss on the sale of XYZ common stock. The following information was taken from the partnership’s financial statements for the current year.

Cash Receipts:

Service Fees Collected	$803,000
Taxable dividend income	$6,600
Taxable Business Interest Income	$2,400
Tax Exempt Interest	$1,600
Proceeds from sale of XYZ common stock	$15,000
Total Receipts	$828,600

Cash Disbursements:

Compensation (salary) to owners	$150,000
Customer refunds	$5,000
Office rent	$29,000
Federal income tax payments ($10K/quarter)	$40,000
Utilities	$7,498
Employee Salaries	$350,000
Business and Professional Licenses	$3,000
Cash Contribution to Red Cross	$1,000
Meals and Entertainment (100%)	$2,200
Travel	$6,000
Office supplies and expense	$10,400
Accounting (professional) fees	$11,000
Advertising	$18,000
Payroll Taxes	$48,600
Business interest (on equipment loan)	$1,600
General Liability Insurance Expense	$3,200
Principal Payments on equipment loan	$12,000
Dividend payments to owners	$120,000
Equipment rental	$5,000
Total disbursements	$823,498

The current income statement for the company reflects a book net income of been made to record regular depreciation in the amount of $14,002.

The balance sheets for the corporation were as follows for the current year:

Account	January 1, 2017	December 31, 2017
Cash	$95,761	?
Tax-Exempt securities (at cost)	$32,000	$32,000
Marketable Securities (at cost)	$125,000	?
Machinery & equipment	$85,000	$85,000
Accumulated depreciation	($36,761)	?
Total Assets	$301,000	?
Nonrecourse equipment loan	$35,000	?
Common stock	$40,000	?
Additional Paid-in Capital	$160,000	?
Retained Earnings	$66,000	?
Total Liabilities and capital	$301,000	?

request 1120 schedul m-1 and form 4562

Answer 1

The Balance Sheet for the RAT Inc. for the year ended December 31, 2017

Account	January 1, 2017	December 31, 2017
Cash	$95,761	$100,863
Tax-Exempt securities (at cost)	$32,000	$32,000
Marketable Securities (at cost)	$125,000	$100,000
Machinery & equipment	$85,000	$85,000
Accumulated depreciation	($36,761)	($50,763)
Total Assets	$301,000	$267,100
Nonrecourse equipment loan	$35,000	$23,000
Common stock	$40,000	$40,000
Additional Paid-in Capital	$160,000	$160,000
Retained Earnings	$66,000	$44,100
Total Liabilities and capital	$301,000	$267,100

Working Notes:

Calculation of Cash

Account	Amount($)
Opening Cash (January 1, 2017)	$95,761
Add: Total Receipts during the year	$828,600
Less: Total Disbursements during the year	$823,498
Closing Cash (December 31, 2017)	$100,863

Calculation of Marketable Securities

Account	Amount($)
Opening Marketable Securities (January 1, 2017)	$125,000
Less: Sale of Marketable Security	$25,000
Closing Marketable Securitues (December 31, 2017)	$100,000

Calcutation of Accumulated Depreciation

Account	Amount($)
Opening Accumulated Depreciation	($36,761)
Add: Depreciation during the year	($14,002)
Closing Accumulated Depreciation	($50,763)

Calcutaion of Nonrecourse equipment loan

Account	Amount($)
Opening Nonrecourse equipment loan	$35,000
Less: Principal Payments on equipment loan	$12,000
Closing Nonrecourse equipment loan	$23,000

Calculation of Retained Earnings

Account	Amount($)
Opening Retained Earnings	$66,000
Add: