Question

Part 2: Schedule M1 (CT1) and M2 (CT2) For Rocky Mountain Equipment Corporation Form 1120-F

The Rocky Mountain Equipment Corporation, a Colorado Corporation, was formed by two Colorado State University business school graduates. The Rocky Mountain Equipment Corporation incorporated on October 20, 1974. The main line of business is selling recreational equipment to outdoor enthusiasts. Starting in their parents’ garage, they have grown the corporation to a multimillion dollar business.

To comply with accounting requirements, the company uses an accrual method of accounting. Its accumulated earnings and profits as of December 31, 2016, were $1,200. It made cash distributions during its 2016 calendar tax year of $140,089. This consisted of $85,089 to preferred shareholders and $55,000 to common shareholders. The entire distribution to preferred shareholders is a taxable dividend. The $27,500 distribution on March 15, 2016, to common shareholders is a taxable dividend to extent of $27,318 (99.33%), and the $27,500 distribution on September 15, 2016, to common shareholders is a taxable dividend to the extent of $26,118 (94.97%).

The following profit and loss account appeared in the books of the Rocky Mountain Equipment Corporation for calendar year 2016. It is required to file Form 1120 and completes Form 1120-F (M-1 and M-2).

Account				Debit	Credit
Gross sales					$1,840,000
Sales returns and allowances				$20,000
Cost of goods sold				1,520,000
Interest income from:
Banks	$10,000
Tax-exempt state bonds	5,000				15,000
Proceeds from life insurance (death of corporate officer)					6,000
Bad debt recoveries (no tax deduction claimed)					3,500
Insurance premiums on lives of corporate officers (corporation is beneficiary of policies)				9,500
Compensation of officers				40,000
Salaries and wages				28,000
Repairs				800
Taxes				10,000
Contributions:
Deductible	$23,000
Other	500			23,500
Interest paid (loan to purchase tax-exempt bonds)				850
Depreciation				5,200
Loss on securities				3,600
Net income per books after federal income tax				140,825
Federal income tax accrued for 2016				62,225
Total				$1,864,500	$1,864,500

The corporation analyzed the retained earnings and the following items appeared in this account on its books.
Item		Debit			Credit
Balance, January 1					$225,000
Net profit (before federal income tax)					203,050
Reserve for contingencies		$10,000
Income tax accrued for the year		62,225
Dividends paid during the year		140,089
Refund of 1995 income tax					18,000
Balance, December 31		233,736
Total		$446,050			$446,050
The following items appear on page 1 of Form 1120.
Gross sales ($1,840,000 less returns and allowances of $20,000)					$1,820,000
Cost of goods sold					1,520,000
Gross profit from sales					$300,000
Interest income					10,000
Total income					$310,000
Deductions:
Compensation of officers			$40,000
Salaries and wages			28,000
Repairs			800
Taxes			10,000
Contributions (maximum allowable)			22,500
Depreciation			6,200
Total deductions					107,500
Taxable income					$202,500

Please prepare Schedule M-1 for Rocky Mountain Equipment Corporation using the financial information and the Form 1120 line items provided above.

Please prepare Schedule M-2 for Rocky Mountain Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.

Answer 1

Schedule M1		Amount
Net income as per books		140825
Federal income tax as per books		62225
Excess of capital loss over capital gain		3600
Income subject to tax not in books
Expenses on books but not in return
a.depreciation
b. Charitable contribution		1000
c travel
d. Other - interest for tax free bonds		10350
Add lines 1 to 5		218000
Income not included in return
a. Tax exempt interest		5000
b. Other		9500
8.deductions not charged in books

a. Depreciation		1000
9. Add line 7 and 8		15500
Income - line 6 less line 9		202500

Schedule M2

Analysis of unappropriates retained earnings

Opening balance		225000
Net income as per books		140825
Other increase - tax refund		18000
4.Add lines 1 ,2 and 3		383825
5.Distributions - cash		140089
Stock
Property
6. Other decreases - reserve		10000
7.Add lines 5 and 6		150089
8. Balance at year end (4-7)		233736

Retained earnings as per tax return reconciliation table

Opening accumulated earning and profit		1200
Add taxable income as per books		140825
Less - bad debt recovered of previous year		(3500)
Current year profits		137325
Profit distribution
Preference dividend from current year		(85089)
Common dividend
94.97% of 27500		(26118)
94.97% of 27500		(26118)
Current year balance profits -		Zero
Dividend charged to accumulated profits		(1200)
Dividend charged to capital (55000-26118-26118-1200)		1564
Accumulated profits balance		0