Part 1: Tax Impacts to Corporation and Shareholder of a IRC Sec. 351 Contribution
Taxpayer A transfers property with an adjusted basis of $10,000 and a fair market value of $50,000 to a controlled corporation in exchange for stock worth $30,000, cash of $10,000, and other property with a fair market value of $10,000. What, if any gain will be recognized?
Part 2: Schedule M1 (CT1) and M2 (CT2) For Rocky Mountain Equipment Corporation Form 1120-F
The Rocky Mountain Equipment Corporation, a Colorado Corporation, was formed by two Colorado State University business school graduates. The Rocky Mountain Equipment Corporation incorporated on October 20, 1974. The main line of business is selling recreational equipment to outdoor enthusiasts. Starting in their parents' garage, they have grown the corporation to a multimillion dollar business.
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 prefe
ed shareholders and $55,000 to common shareholders. The entire distribution to prefe
ed shareholders is a taxable dividend. The $27,500 distribution on March 15, 2016, to common shareholders is a taxable dividend to extent of $27, XXXXXXXXXX%), and the $27,500 distribution on September 15, 2016, to common shareholders is a taxable dividend to the extent of $26, XXXXXXXXXX%).
The following profit and loss account appeared in the books of the Rocky Mountain Equipment Corporation for calendar year 2016. It is required to file Form 1120 and completes Form 1120-F (M-1 and M-2).
Your assignment should be a paper 1-2 pages long, not including the required title and reference pages
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
Othe
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 yea
62,225
Dividends paid during the yea
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
Exercise to be completed:
1. Please prepare Schedule M-1 for Rocky Mountain Equipment Corporation using the financial information and the Form 1120 line items provided above.
2. Please prepare Schedule M-2 for Rocky Mountain Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.
Clearly identify the requirements being addressed. Show all calculations within the cells of an Excel spreadsheet. This means that you must use formulas and links so that the thought process can be examined. Make effective use of comments to convey your thought process as well. No hard coding of solutions. Submit a single MS Excel file for grading.