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 ofXYZ 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 & Professional Licenses 3,000

Cash Contribution to Red Cross 1,000

Meals & Entertainment (100%) 2,200

Travel 6,000

Office supplies & 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 $ ?

REQUIRED: 1. Prepare a 2017 Form 1120 for the corporation including Schedule D and Form 4562. (Do NOT prepare a state return). Prepare supporting schedules as necessary if adequate information is provided. (Hint: If you use a computerized software program, you may override the Form 4562 with asset and current and accumulated depreciation entries).

Answer 1

1120 schedule D

Income	1 Gross receipts or sales Cash disbursements Subtract b) from a)	a) b)	828600 823498		5102
Assets and labilities	Total assets liabilities Nonrecourse equipment loan Additional Paid in capital Total Liabilities Capital = Assets -liabilities		301000 35000 160000 195000		106000
Capital gains	Capital contributions Rader Allen Townsend Total contributions Salaries paid Rader Allen Townsend Total salaries paid Dividends Paid Rader Allen Townsend Total dividends paid Balance = a – (b + c)	a) b) c)	100000 60000 40000 200000   90000   30000   30000 150000 60000 36000 24000 120000		-70000
Long term Capital gains	Gains from stock stock during investment years common stock in books of account increase in common stock income depreciation on common stock income after depreciation balance = a +b	a) b)	25000 15000 10000 98100 14002 84098		94098

Form 4562

Property Expenses	RAT Inc. Rader ownership percentage Allen Townsend Total disbursements		50% 30% 20%		823498
labilities	liabilities Nonrecourse equipment loan Additional Paid in capital Total Liabilities		35000 160000		195000
Depreciation	Depreciation on common stock		14002		14002
MACRS Depreciation	Depreciation for taxation purposes		21602		14002
Salaries for owners	Salaries paid Rader Allen Townsend Total salaries paid		90000   30000   30000		150000
Dividends paid to owners	Dividends Paid Rader Allen Townsend Total dividends paid		60000 36000 24000		120000