S Corporation Tax Return Problem
Required:
XXXXXXXXXXUsing the information provided below, complete First Place Inc.’s (FPI) 2017 Form 1120S. Also complete Kate Kleiber’s Schedule K-1.
XXXXXXXXXXForm 4562 for depreciation is not required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120S.
XXXXXXXXXXIf any information is missing, use reasonable assumptions to fill in the gaps.
XXXXXXXXXXThe forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms.
Facts:
First Place Inc. (FPI) was formed as a corporation on January 5, 2014, by its two owners Kate Kleiber and James Chandler. FPI immediately elected to be taxed as an S corporation for federal income tax purposes. FPI sells mountain climbing gear to retailers throughout the Rocky Mountain region. Kate owns 70 percent of the FPI common stock (the only class of stock outstanding) and James owns 30 percent.
XXXXXXXXXXFPI is located at 4200 West 400 North, Salt Lake City, Utah 84116.
XXXXXXXXXXFPI’s Employer Identification Number is XXXXXXXXXX.
XXXXXXXXXXFPI’s business activity is wholesale sales. Its business activity code is 423910.
XXXXXXXXXXBoth shareholders work as employees of the corporation.
XXXXXXXXXXKate is the president of FPI (Social Security number XXXXXXXXXXKate’s address is 1842 East 8400 South, Sandy, Utah 84094.
XXXXXXXXXXJames is the vice president of FPI (Social Security number XXXXXXXXXXJames’s address is 2002 East 8145 South, Sandy, Utah 84094.
XXXXXXXXXXFPI uses the accrual method of accounting and has a calendar year-end.
Page C-24
The following is FPI’s 2017 income statement:
FPI
Income Statement
For year ending December 31, 2017
Revenue from sales $ 980,000
Sales returns and allowances (10,000)
Cost of goods sold (110,000)
Gross profit from operations $ 860,000
Other income:
Dividend income $ 15,000
Interest income XXXXXXXXXX,000
Gross income $ 880,000
Expenses:
Compensation $(600,000)
Depreciation (10,000)
Bad debt expense (14,000)
Meals and entertainment (2,000)
Maintenance (8,000)
Business interest (1,000)
Property taxes (7,000)
Charitable contributions (10,000)
Other taxes (30,000)
Rent (28,000)
Advertising (14,000)
Professional services (11,000)
Employee benefits (12,000)
Supplies (3,000)
Other expenses (21,000)
Total expenses (771,000)
Net income $ 109,000
Notes:
FPI’s purchases during 2017 were $115,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §263A do not apply to FPI.
Of the $5,000 interest income, $2,000 was from a West Jordan city bond used to fund public activities (issued in 2007) and $3,000 was from a money market account.
FPI’s dividend income comes from publicly traded stocks that FPI has owned for two years.
FPI’s compensation is as follows:
XXXXXXXXXXKate, $120,000
XXXXXXXXXXJames, $80,000
XXXXXXXXXXOther, $400,000.
FPI wrote off $6,000 in accounts receivable as uncollectible during the year.
FPI’s regular tax depreciation was $17,000. AMT depreciation was $13,000.
FPI distributed $60,000 to its shareholders.
FPI is not required to compute the amount in its accumulated adjustments account.
Page C-25
The following are FPI’s book balance sheets as of January 1, 2017, and December 31, 2017.
2017
January 1 December 31
Assets
Cash $ 90,000 $143,000
Accounts receivable 300,000 310,000
Allowance for doubtful accounts (60,000) (68,000)
Inventory 45,000 50,000
State and local bonds 38,000 38,000
Investments in stock 82,000 82,000
Fixed assets 100,000 100,000
Accumulated depreciation (20,000) (30,000)
Other assets 20,000 21,000
Total assets $595,000 $646,000
Liabilities and Shareholders’ Equity
Accounts payable $ 60,000 $ 55,000
Other cu
ent liabilities 5,000 8,000
Other liabilities 10,000 14,000
Capital stock 200,000 200,000
Retained earnings 320,000 369,000
Total liabilities and shareholders’ equity $595,000 $646,000
Forms that need to be populated for assignment submission.
1125A
1120S
K1 Form
Adobe Acrobat
Document
Form XXXXXXXXXXA
(Rev. October 2016)
Department of the Treasury
Internal Revenue Service
Cost of Goods Sold
▶ Attach to Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B.
▶ Information about Form 1125-A and its instructions is at www.irs.gov/form1125a.
OMB No XXXXXXXXXX
Name Employer identification numbe
1 Inventory at beginning of year . . . . . . . . . . . XXXXXXXXXX1
2 Purchases . . . . . . . . . . . . . . . . . XXXXXXXXXX2
3 Cost of labor . . . . . . . . . . . . . . . . XXXXXXXXXX3
4 Additional section 263A costs (attach schedule) . . . . . . XXXXXXXXXX4
5 Other costs (attach schedule) . . . . . . . . . . . XXXXXXXXXX5
6 Total. Add lines 1 through 5 . . . . . . . . . . . . XXXXXXXXXX6
7 Inventory at end of year . . . . . . . . . . . . . XXXXXXXXXX7
8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2 or the
appropriate line of your tax return. See instructions . . . . . XXXXXXXXXX8
9a Check all methods used for valuing closing inventory:
(i) Cost
(ii) Lower of cost or market
(iii) Other (Specify method used and attach explanation.) ▶
Check if there was a writedown of subnormal goods . . . . . . . . . . . . . . . . . . . . . . ▶
c Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) . . . . . . ▶
d If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed
under LIFO . . . . . . . . . . . . . . . . . XXXXXXXXXX9d
e If property is produced or acquired for resale, do the rules of section 263A apply to the entity? See instructions . . Yes No
f Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If “Yes,”
attach explanation . . . . . . . . . . . . . . . . . . . XXXXXXXXXXYes No
Section references are to the Internal
Revenue Code unless otherwise noted.
General Instructions
Purpose of Form
Use Form 1125-A to calculate and deduct
cost of goods sold for certain entities.
Who Must File
Filers of Form 1120, 1120-C, 1120-F,
1120S, 1065, or 1065-B, must complete
and attach Form 1125-A if the applicable
entity reports a deduction for cost of goods
sold.
Inventories
Generally, inventories are required at the
eginning and end of each tax year if the
production, purchase, or sale of
merchandise is an income-producing
factor. See Regulations section XXXXXXXXXXIf
inventories are required, you generally
must use an accrual method of accounting
for sales and purchases of inventory items.
Exception for certain taxpayers. If you
are a qualifying taxpayer or a qualifying
small business taxpayer (defined below),
you can adopt or change your accounting
method to account for inventoriable items
in the same manner as materials and
supplies that are not incidental.
Under this accounting method, inventory
costs for raw materials purchased for use
in producing finished goods and
merchandise purchased for resale are
deductible in the year the finished goods or
merchandise are sold (but not before the
year you paid for the raw materials or
merchandise, if you are also using the cash
method).
If you account for inventoriable items in
the same manner as materials and