Corporation (Form 1120) Fall 2018 Rick Smith, Bill Thomas, Diane Asche, and Jill Renteria are equal owners in “STAR, Inc.” – a corporation engaged in HR consulting. Pertinent information regarding STAR is summarized below. • Social security numbers are as follows; Rick – 648-98-4321; Bill – 486-63-4297; Diane – 855-21-1750; and Jill – 896-49-2341. Rick is the President of the company. • The address of the company is 2835 Bay View Drive, Wilmington, NC 26812. • The company was incorporated and began operations on January 1, 2012. • The business code is 561900. • The federal identification number is 67-1234576 • The company uses the cash method of accounting and the calendar year for reporting. • The company claimed $8,119 depreciation for book purposes, but $11,919 for tax purposes (under a MACRS methodology). Assume none of the depreciation creates a tax preference or adjustment for AMT purposes. The company is NOT a personal holding company. • All loan borrowings were used exclusively for acquisition of equipment, consequently, all interest is considered business interest. • No compensation was paid to Thomas, Asche, or Renteria, but each of the four owners withdrew $35,000 as a dividend of operating profits. There was no distribution of any non-cash property. • The equipment loan is nonrecourse debt to the owners. All initial equity contributions were paid equally and each individual owns 25% of the common stock. • None of the owners 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 North Carolina. All owners are U.S. citizens. The company had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or other corporations. The company is not publicly traded. • The company is not subject to the consolidated audit procedures. The company files its return in Cincinnati, OH. • Rick Smith lives at 572 Knowles Ct., Wilmington, NC 26811, Bill Thomas lives at 942 Richland Dr., Wilmington, NC 26812; Diane Asche lives at 1342 Coastal Rd., Wilmington, NC 26812; and Jill Renteria lives at 550 Rocker Ave., Wilmington, NC 26812. • The company’s marketable securities represent small investments (<1% ownership) in a number of publicly traded companies and mutual funds. • The company sold its holdings of XYZ Corporation (carried as Marketable Securities on the balance sheet) on July 10 for $5,000. The corporation purchased this investment several years ago for $9,000. (The proceeds from this sale are listed as a cash receipt below. The company has no prior-year capital gains or losses.) The current income statement for the company reflected book net income of $ 159,900 AFTER book depreciation has been taken on the equipment, and the loss on the sale of XYZ Mutual Fund, and $44,000 of recorded federal income tax expense. The following information was taken from the corporation’s financial statements for the current year. Cash Receipts: Fees collected $755,000 Taxable qualified dividend income 3,600 Taxable business interest income 2,400 Tax Exempt interest 2,600 Proceeds from sale of XYZ Corp. common stock $ 5,000 Total Receipts $768,600 Cash Disbursements: Compensation to Rick Smith $120,000 Dividend payments to shareholders ($35K each) 140,000 Customer Refunds 3.000 Office Rent 26,000 Utilities 6,700 Administrative employee salaries 310,000 Federal income tax payments ($11,000/Qtr.) 44,000 Business & Professional Licenses 2,000 Cash Contribution to United Way 1,000 Business Meals (100%) 3,600 Business Travel 7,000 Office supplies & expense 12,000 Accounting (Professional) fees 8,000 Advertising 7,000 Taxes (Payroll, State, Local) 28,600 Business interest (on equipment loan) 4,481 Principal payments on equipment loan 15,000 General Liability Insurance Expense 3,200 Equipment rental 5,000 Total Disbursements 746,581 Journal entries have been made to record regular (book) depreciation in the amount of $8,119. MACRS tax depreciation was not recorded in the book records. Principal payments against the equipment loan amounted to $15,000 for the year. The balance sheets (book basis) for the company were as follows for the current year: Account January 1, 2018 December 31, 2018 Cash $ 86,576 $ ? Tax-exempt securities (at cost) 52,000 52,000 Marketable Securities (at cost) 120,000 ? Office furniture & equipment 65,000 65,000 Accumulated depreciation ( 36,576) ________? Total assets $ 287,000 $ ? Nonrecourse equipment loan $ 47,000 $ ? Common Stock $ 48,000 $ ? Retained Earnings $ 192,000 $_______? Total liabilities and capital $ 287,000 $ ? REQUIRED: 1. Prepare a Form 1120 for the corporation for 2018 including Form 4562. (Do NOT prepare a state return). Prepare supporting schedules as necessary if adequate information is provided. You will need to log into the IRS website and print the blank DRAFT forms for 2018. (Final forms are not yet available). Go to: www.irs.gov/draftforms and type “Form 1120” in the search box.

Prepare entries, in general journal form, to record the following transactions in the proper fund(s) and/or account group(s). Designate the fund or account group in which each entry is recorded.

1.   Bond proceeds of $2,000,000 were received to be used in constructing a new City Jail. An equal amount is contributed from general revenues.

2.   Serial bonds in the amount of $300,000 matured. Interest of $75,000 was paid on these and other serial bonds outstanding.

3.   Insurance proceeds amounting to $19,000 were received as a result of the accidental destruction of a garbage truck costing $33,000. Accumulated depreciation on the truck was $21,000.

4.   The City Parks Endowment Fund transferred $160,000 in expendable funds to the City Parks Special Revenue Fund.

5.   Proceeds of $21,000 were received from the sale of equipment which had been purchased from general revenues at a cost of $100,000. Accumulated depreciation on the equipment was $75,000.

6.   The City Power Company (an enterprise fund) issued a bill for $400,000 for electricity provided to municipal government buildings.

7.   The City Power Company transferred excess funds of $90,000 to the General Fund.

8.   A central data processing center was established by a contribution of $400,000 from the General Fund, a long-term loan of $130,000 from the City Parks Special Revenue Fund, and general obligation bond proceeds of $180,000.

9.   The Data Processing Fund billed the General Fund $20,000 and the City Parks Special Revenue Fund $8,500 for data processing services.

            10. The City Power Company received $7,000 as customer deposits during the year. The monies are to be held in     trust until customers request that their services be discontinued and final bills are collected.

11. In order to retire general obligation term bonds when they become due, it is determined that the Debt Service Fund will require annual contributions of $40,000 and earnings in the current year of $3,000.

The yearly salary (in thousands of dollars) for a small company are listed below. Find the mode, mean, median and population standard deviation and use the Empirical Rule to find a 95% confidence interval. 74 67 39 75 98 67 460 96

General, Inc. leases equipment to different types of businesses. The company generally acquires the equipment and leases the equipment to its customers under long-term sales-type leases. General’s implicit interest in the lease arrangements is 10% annual rate.

General leased its machine that it purchased for $30,900 to a lessee, Oscar Company on January 1, 2018. The lease contract specified annual payments of $8,000 beginning January 1, 2018, the beginning of the lease, and each January 1 through 2020 (three-year lease term). Oscar Company has the option to purchase the machine at the end of the lease term, December 31, 2020, for $12,000 when it is expected to have a residual value of $16,000, considered a bargain purchase amount. The Company’s year-end is 12/31.

Required:

1. Show how General calculated the $8,000 annual lease payments for this sales-type lease.

2. Prepare an amortization schedule that describes the pattern of interest revenue for General, Inc. over the lease term.

3. Prepare the appropriate entries for General, Inc. from the beginning of the lease through the end of the lease term.

1. Problem #1 Professor Quark opens his own company, Electronic Tutorial Services, and completes the following transactions in June:

• 6/1 Quark invests $12,000 into the business.
• 6/3 Purchased $1,800 of equipment on account.
• 6/4 Paid $360 for a two-year insurance policy.
• 6/6 Purchased office supplies for cash, $300.
• 6/9 Purchased a new computer for $7,500. Paid $1,500 cash agreed to pay the remainder in 30 days.
• 6/10 Billed student Fiona Smith $40 for tutorial services that were performed.
• 6/14 Paid for the equipment purchased on June 3rd.
• 6/25 Received $35 cash from student Bert Bantrum for tutorial services performed.
• 6/30 Student billed on June 10 pays the amount due to Quark.
• 6/30 Quark withdraws $500 for personal use.

Required: Prepare the journal entries to record these transactions. How much cash did Professor Quark have at the end of June?

2. Problem #2 Maria Sanchez started the Merry Mowers lawncare business. She began operations on May 1st and completed the following transactions, which included her initial investment of $8,000 cash. After these transactions, the ledger included the following accounts with normal balances.

• Cash $ 9,440     
• Office Supplies 500        
• Equipment 3,000     
• Accounts Payable 500        
• Notes Payable 2,000     
• Maria Sanchez, Capital 8,000     
• Lawncare Revenue 3,200     
• Gas and Oil Expense 210        

Required: Prepare a balance sheet and income statement for this business at the end of May.

3. Problem #3 Below are accounts listed for September for PC Partners, a company that installs/repairs home computers for customers. The business is owned by Ed Connor. The accounts are listed in alphabetical order. For the month of September, prepare an income statement and a balance sheet.

ACCOUNT BALANCE

Accounts Payable 4,200

Accounts Receivable 8,480

Advertising expense 420

Capital (Ed Connor) at 08/31/04 56,000

Cash 35,460

Entertainment Expense 600

Equipment 15,700

Installation Revenue 15,600

Miscellaneous Revenue 800

Photocopying Expense 150

Rent Expense 1,300

Repair Revenue 8,650

Supplies 8,400

Truck 8,500

Unearned Revenue 760

. Kurbe Marketing Research

Kurbe Marketing Research (KMR), located in Boston, specializes in marketing research in the consumer goods industry. Each year KMR conducts hundreds of research studies for a variety of clients utilizing focus groups, internet surveys and telephone surveys. KMR is currently studying the resources it dedicates to telephone surveys.

Demand for KMR’s telephone research varies throughout the year. KMR conducts the vast majority of its research in-house, but if it cannot handle all of the work at peak demand times, it is forced to subcontract some of the phone interviewing, which results in a lower profit margin. Also, outsourcing the phone interviews means that KMR loses some control of the process. This can result in problems such as missed deadlines and a decrease in quality. However, dedicating enough resources to ensure no outsourcing would not be very efficient, since it would result in more costs and decreased productivity due to idle time during slower periods. Nonetheless, based on the recent amount of outsourcing, KMR management feels that the company has too few operators conducting telephone survey research. You have been assigned the task of studying this problem and making a recommendation.

The annual fixed costs (management, facilities and other overhead charges) associated with the telephone survey group are $320,000. Every operator needs a computer-assisted telephone interviewing station (known as a CATI). Currently KMR has 48 CATIs and they are considering purchasing additional ones this year. Of the 48 CATIs currently on hand, 16 per year will be replaced each year for the next 3 years. New CATIs will not need replacement over this time period.

The purchase cost of a CATI is $36,000 and is likely to remain stable for the next 3 years. The cost of an operator (one per CATI) per month is $2,200. Assume that only additional CATIs (beyond the current number of 48) require training (replacement CATIs do not since they already have operators).

The time frame for the study is the next three years. Demand varies by month and forecasted demand for the coming year is shown in the table below (demand is expressed in dollars of revenue). A CATI can handle approximately $12,000 of work per month. Demand is expected to grow by 10% per year (the forecasted amounts in the table have already factored this in for next year). Assume that each month’s demand will grow by this amount in years 2006 and 2007. This increase in revenue will come from increased volume of work rather than increases in pricing (the forecast assumes stable pricing).

Month             Demand ($000)

January                        $890

February                      $820

March                          $575

April                            $860

May                             $695

June                             $330

July                              $740

August                        $700

September                   $255

October                       $750

November                   $170

December                    $160

Forecasted demand (in dollars of revenue) for 2005

Management is looking for the best level of in-house operation (number of CATIs). KMR receives 15% of the revenue for the work that is outsourced to an outside vendor. Finally, for studies such as this, KMR uses an annual discount rate of 10% and their tax rate is 34%.

a. Build a spreadsheet to help KMR analyze this situation. In your base case, evaluate the NPV of net income after taxes assuming KMR maintains 48 CATIs in all years.

You may use the following page to sketch your spreadsheet (although your sketch will not be graded). Your spreadsheet will be graded both for its technical correctness and for its adherence to the principles of spreadsheet engineering. Note, however, that documentation is not required, nor is extensive formatting for appearance.

b. Construct a graph on a separate sheet in your workbook to show the sensitivity of the NPV of net income after taxes to the number of CATIs. Sketch your results here, showing numerical scales for the horizontal and vertical axes, and clearly identify the optimal number of CATIs.

c. In the base case (with 48 CATIs) how much lower does KMR’s tax rate have to be to increase the NPV of net income after taxes by 10%?

In May 2004, a Gallup Poll of adults’ attitudes toward Health Maintenance Organization (HMOs) found that 41% of adults had little or no confidence in HMOs, 38% had some confidence, 17% had a great deal or quite a lot of confidence, and 4% had no opinion (USA TODAY, June 22, 2004). Let us denote these outcomes as L, S, G, and N, respectively. A recent random sample of 500 adults yielded the frequency distribution given in the following table.   Response L S G N Frequency 212 198 82 8

a. Determine the rejection region.

b. Using the 2.5% significance level, can you conclude that the current distribution of opinions differs from the distribution of May 2004?

At June 30, 2017, the end of its most recent fiscal year, Blue Computer Consultants’ post-closing trial balance was as follows:

The company underwent a major expansion in July. New staff was hired and more financing was obtained. Blue conducted the following transactions during July 2017, and adjusts its accounts monthly.

Adjustment data:

The chart of accounts for Blue Computer Consultants contains the following accounts: Cash, Accounts Receivable, Supplies, Prepaid Insurance. Prepaid Rent, Equipment, Accumulated Depreciation—Equipment, Accounts Payable, Notes Payable, Interest Payable, Income Taxes Payable, Salaries and Wages Payable, Unearned Service Revenue, Common Stock, Retained Earnings, Dividends, Income Summary, Service Revenue, Supplies Expense, Depreciation Expense, Insurance Expense, Salaries and Wages Expense, Advertising Expense, Income Tax Expense, Interest Expense, Rent Expense, Supplies Expense, and Utilities Expense.

Journalize and post adjusting entries for the month ending July 31. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

At June 30, 2017, the end of its most recent fiscal year, Blue Computer Consultants’ post-closing trial balance was as follows:

The company underwent a major expansion in July. New staff was hired and more financing was obtained. Blue conducted the following transactions during July 2017, and adjusts its accounts monthly.

Adjustment data:

The chart of accounts for Blue Computer Consultants contains the following accounts: Cash, Accounts Receivable, Supplies, Prepaid Insurance. Prepaid Rent, Equipment, Accumulated Depreciation—Equipment, Accounts Payable, Notes Payable, Interest Payable, Income Taxes Payable, Salaries and Wages Payable, Unearned Service Revenue, Common Stock, Retained Earnings, Dividends, Income Summary, Service Revenue, Supplies Expense, Depreciation Expense, Insurance Expense, Salaries and Wages Expense, Advertising Expense, Income Tax Expense, Interest Expense, Rent Expense, Supplies Expense, and Utilities Expense.

Journalize the July transactions. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Carolyn Shaw is 27. - She works as an accountant for an oil company. - Her salary next year will be $80,000. - She expects to receive a 5 percent raise each year until she retires at age of 65. - Carolyn is considering a return to school to pursue an MBA degree. - She expects the cost of books, tuition, and fees to be $70,000 the first year and $72,000 the second. - These costs are paid at the beginning of the year (as you surely know). - She will not work while in school. - Graduates of the school Carolyn is considering receive starting salaries that average $130,000. - Raises average 7 percent per year. - Carolyn considers the opportunity costs to be 12 percent. a)Determine the present value of Carolyn’s lifetime earnings if she does not return to school. b)Determine the present value of Carolyn’s lifetime earnings with an MBA degree. Remember, she won’t start her job for two years. c) What is the NPV of an MBA degree given Carolyn Shaw's assumptions?