Question

In: Accounting

Equipment Corporation incorporated was established on October 20, 1974. to comply with accounting requirements, the company...

Equipment Corporation incorporated was established on October 20, 1974. 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 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

  1. Please prepare Schedule M-1 for the Equipment Corporation using the financial information and the Form 1120 line items provided above.
  1. Please prepare Schedule M-2 for the Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.

Solutions

Expert Solution

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

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