The Lost and Found Corporation Company Data

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Tax return for the Lost and Found corporation



The Lost & Found Corporation Federal Tax Return Shakira Kumar, a computer engineer, developed and patented locator chips used in ink pens that give off an alarm when the owner is ten feet or more away from it. The owner places one chip in their purse, backpack, eyeglasses, etc. and the pen sounds an alarm if it is left behind. These pens are very popular with high school and college students. Shakira set up the Lost & Found Corp. to manufacture and sell her product. The Lost & found Corp. is owned by the Kumar family. The corporation is a small, closely held manufacturer (the business code number is 339900, and the employer identification number is 111111111). The company is located at 120 Point Blvd., Newton, Massachusetts 02458. The corporation, which uses a calendar year for tax purposes, has been an S corporation since its incorporation on August 2, 2007. Shakir Kumar (social security number 123-45-6789 is president of the corporation. Shakira owned 100% of the stock until September 15, 2011 when she sold 1% to Jillian Kumar (Shakiras aunt, social security number 123-45-6788), who serves as vice president for the company. Both officers devote 100 percent of their time to the corporation and live at 75 Writers Block, Newton, and Massachusetts 02458. Annual compensation is $66,096 for Shakira and $ 33,048 for Jillian. The corporation does not engage in activities to which the at risk or passive activity loss limitations apply The corporation files its tax return on the accrual method. Inventory has been consistently valued at cost under the FIFO method using the full absorption procedure, Inventory capitalization rules of Internal Revenue Code Section 263A do not apply due to the small business exception (average annual gross receipts for the three preceding taxable years do not exceed $10 million). The accounting records are computerized/ The Lost and Found Corporation Income Statement For the year ending December 31, 2011 Revenue: Sales (net) Cost of goods sold Gross Profit Opiating Expenses: Compensation of officers Other salaries and wages Employee benefits Rental Expense Interest Expense Advertising Key Person life insurance premiums Contributions $2,077,453 $(1,538,252) $539,201 $99,144 225,457 10,102 23,490 12,536 6,428 6,096 772

Depreciation Taxes (other than income taxes) Repairs and maintenance Miscellaneous expense Total operating expense Net Income from Operations Other Income and loss: Dividend Income Interest Income Gain on sale of investment in stock Gain on sale of machine Casualty loss on machine Net Income

30,055 21,314 11,998 3636 $(451,028) $ 88,173

$2614 412 2,227 7,988 (551) 12,690 $100,863 The Lost and Found Corp. Statement of Financial Position December 31, 2010 Beginning of Year


End of Year

Current Assets: Cash and Marketable Securities Accounts Receivable Inventory Total Current Assets Machinery and Equipment Machinery and Equipment Less: Accumulated depreciation Total Machinery and equipment (net) Other assets: Life Insurance cash surrender value Total Assets Liabilities and Shareholders’ Equity Current liabilities: Accounts payable Notes payable (less than one year) Total current liabilities

$10,303 41,542 177,053 228,898

10,502 26,218 170,568 207,288

$262,402 (21,334) 241,068

309,526 (40,097) $269,429

$15,844 $485,810

$20,128 $496,845

$16,260 19,722 $35,982

$19,078 20,712 $39,790

Notes payable (one year or more) Total Liabilities Common stock (2,754 shares authorized, Issued and outstanding, $100 par) Retained earnings Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity

66,096 $102,078

31,080 70,870

$275,400 108,332 $383,732 $485,810

$275,400 150,575 $425,975 $496,845

Beginning Retained Earnings Net income for the year Dividends paid during the year Endings Retained

Statement of Retained Earnings $108,332 100,863 (58,620) $150,575

1. Included in employee benefits expense are $502 and $358 premiums for $50,000 (face) Group term life insurance premiums for Shakira and Jillian, respectively. Family members are named beneficiaries in the policies. 2. All notes payable were issued at par and provide market interest rates. 3. Employees account to the company and are reimbursed by the exact amount of travel and entertainment expenses incurred on business. Included in Miscellaneous Expense is $1,511 for transportation expense, $276 for meals. And $166 for entertainment. 4. Dividend income is from minor investments in: Ink corp. 1,841 United Insurance Company (a dividend on the key person Life insurance policy) 773 Total 2614 5. Contributions were paid in cash to: Peta 551 Republican Party 221 Total Contributions 772 6. The key-person life insurance policy provides $500,000 coverage on SHakira Kumar. The company is the owner and beneficiary of the policy. 7. A scheduled attached in the prior years working papers reconcile Retained Earnings and Accumulated Adjustments Account balances at 12/31/10 as follows: Balance per Schedule L (Balance Sheet) $108,332 Accumulated depreciation for machinery and equipment (M&E) for tax M&E Acquired 07/01/09 $8,543 M&E Acquired 02/01/10 34,338 $42,881 Accumulated depreciation per books 21,334

8. 9. 10. 11.



14. 15.

Excess of Accumulated Tax over Book Depreciation for M&E (21,547) Balance per Schedule M (Analysis of the Accumulated Adjustments Account) $86,785 The balance of the “Other Adjustments Account” (Form 1120S) at the beginning of the year was $0. Depreciation information is attached. Machine #2 purchased on 2/01/10 for $55,080, was sold to an unrelated party on 11/01/11 for $56,182. Machine #1, purchased on 7/01/09 for $22,032, was totally destroyed by severe storm that flooded the piece of machinery on 4/01/11. Proceeds of $17,075 were received from the insurance company. On 8/1/11 $16,524 of the proceeds were invested in a replacement machine. Assume there will be no further qualified reinvestments of the proceeds. Interest expense was on loans for the following purposes: Purchase M&E $5,934 Invest in stock Ink Corp. 991 Invest in Suffolk county, Massachusetts water and sewer bonds 110 Cover shortage in working capital 5501 Total $12,536 On June 5, 2011, 450 shares of Ink Corp. common stock were sold. The company bought 1,800 shares of the stock on June 2, 2010 for $6,610. The stock was split 3for-1 on February 21, 2011 (clue: use the book gain and basis to compute the proceeds.) On May 15, 2010 The Lost & Found Corp. purchased at par $10,200 of Suffolk, Massachusetts water and sewer bonds. Interest $412 was received on the bonds during the year. Assume that compensation of officers and other salaries and wages do not relate to production activities. This assumption removes the Domestic Production Activities deduction from this practice set.

Required: From the above information, prepare the Lost and Founds Corps 2011 Federal Income tax return Form 1120S, including all supporting statements, schedules, and forms. Unless otherwise noted, assume the corporation makes all available elections to minimize the shareholders current taxable income. Round amounts to the nearest dollar. If additional info is needed, make realistic assumptions and fill in all required data. Even though the corporation may not be technically required to do so, Shakira has expressed a desire that schedule L (balance sheets (, schedule M-1 (reconciliation of Income (Loss) per books With Income (Loss) per return), and Schedule M-2 (Analysis of accumulated adjustments account, and Shareholders Undistributed Taxable Income Previously Taxed) on Form 1120S, p4 be completed

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