Equipment Corporation incorporated was established on October20, 1974. to comply with accounting requirements, the company usesan accrual method of accounting. Its accumulated earnings andprofits as of December 31, 2016, were $1,200. It made cashdistributions during its 2016 calendar tax year of $140,089. Thisconsisted of $85,089 to preferred shareholders and $55,000 tocommon shareholders. The entire distribution to preferredshareholders is a taxable dividend. The $27,500 distribution onMarch 15, 2016, to common shareholders is a taxable dividend toextent of $27,318 (99.33%), and the $27,500 distribution onSeptember 15, 2016, to common shareholders is a taxable dividend tothe extent of $26,118 (94.97%).
The following profit and loss account appeared in the books ofthe Equipment Corporation for calendar year 2016. It is required tofile 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 (corporationis 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 thefollowing 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 Form1120. | | |
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 |
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- Please prepare Schedule M-1 for the EquipmentCorporation using the financial information and the Form 1120 lineitems provided above.
- Please prepare Schedule M-2 for the EquipmentCorporation using the retained earning information provided. Toaccurately calculate and support the ending balance, pleasecomplete a Retained Earnings Reconciliation Table.
