Response to the following problem:
FACTS:
Konk, Inc. is a calendar year, accrual basis taxpayer founded January 1, 2018. The company's 2018 income statement prepared in accordance with GAAP is presented below:
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Revenues
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Net sales
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$3,000,000
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Cost of goods sold
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-1,910,000
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Gross profit
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$1,090,000
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Expenses
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Salaries and wages
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$500,000
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[ 1]
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Taxes
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137,000
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[ 2]
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Office supplies
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11,000
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Contributions to charity
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40,000
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Insurance
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20,000
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Depreciation
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50,000
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[ 3]
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Repairs and maintenance
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12,000
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Advertising
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42,000
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Travel and entertainment
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25,000
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[ 4]
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Legal and accounting
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1,000
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Total expenses
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$838,000
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Net income before other items
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$252,000
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Loss sale of stock
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-10,000
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[ 5]
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Dividend income
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20,000
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[ 6]
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Interest
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18,000
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[ 7]
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Net income
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$280,000
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The following additional information is provided:
[ 1] Officer salary (C. Konk 388-88-8765, 100% common stock
and 100% time in the business) $ 150,000
Other salaries 300,000
Accrued bonuses (all paid 1/5/19, including $10,000 to C. Konk) 30,000
Accrued vacation pay (all vacations will be taken in the summer) 20,000
$ 500,000
[ 2] Taxes consist of:
Federal income taxes (interperiod tax calculation) $ 60,000
State income taxes 37,000
Payroll taxes 38,000
Penalty for late payment of taxes 2,000
Total $ 137,000
* The company made $58,000 of federal estimate tax payments for 2018.
[ 3] Depreciation per books is straight line. For tax purposes, depreciation amounted to $86,000.
[ 4] In this number are: Meals of $8,000 and entertainment of $1,000. (50% of meals is deductible. Under new law, no entertainment is deductible)
[ 5] Sale of stock consist of stock of the following unrelated corporations:
Ral Corp. (short-term) $ 1,000
Blu, Inc. (long-term) -11,000
[ 6] Received from .01% stock ownership interest in Microsoft, Inc. = $10,000.
Received from 21% stock ownership interest in Loknok, Inc. = $10,000.
(Both qualify for the dividends received deduction.)
[ 7] Interest revenue consists of interest on:
Corporate bonds $15,000
Municipal bonds 3,000
Required:
Complete only federal form 1120 for 2018.Ignore references to other forms. Complete Schedule K by making up answers to questions where data has not been included. Schedule L and M-2 can be left blank since balance sheets and other information has not been included to complete these.
Review the form 1120 and instructions from the IRS home page.
You MUST include a work paper that details any supporting calculations and comments about any issues you addressed. Consider this the same as a sheet you would provide to your supervisor at work whose task is to verify every item that you input on the return.
Also, assume on schedule J that the company is allowed a credit from form 3800 of $12,780.