Problem 3—C Corporation (FORM 1120)

On November 1, 2005, Janet Morton and Kim Wong formed Pet Kingdom, Inc., to sell pets and pet supplies. Pertinent information regarding Pet Kingdom is summarized as follows:

  • Pet Kingdom’s business address is 1010 Northwest Parkway, Dallas, TX 75225; its telephone number is (214) 555-2211; and its e-mail address is petkingdom@pki.com.
  • The employer identification number is 11-1111111, and the principal business activity code is 453910.
  • Janet and Kim each own 50% of the common stock; Janet is president and Kim is vice president of the company. No other class of stock is authorized.
  • Both Janet and Kim are full-time employees of Pet Kingdom. Janet’s Social Security number is 123-45-6789, and Kim’s Social Security number is 987-65-4321.
  • Pet Kingdom is an accrual method, calendar year taxpayer. Inventories are determined using FIFO and the lower of cost or market method. Pet Kingdom uses the straight-line method of depreciation for book purposes and accelerated depreciation (MACRS) for tax purposes.
  • During 2018, the corporation distributed cash dividends of $306,495.

 

Pet Kingdom’s financial statements for 2019 are shown below.

 

 

Income Statement

 

Income

Gross Sales                                                                                                                                                 $4,600,000

Sales returns and allowances                                                                                                             (160,000)

Net Sales                                                                                                                                                     $4,440,000

Cost of goods sold                                                                                                                                   (1,840,000)

Gross Profit                                                                                                                                                                $2,600,000

Dividends received from stock Investments

in less-than-20%-owned U.S. corporations                                                                          35,000

Interest Income:

State bonds                                                                        $12,000

Certificates of deposit                                                  16,000                                                   28,000

Total income                                                                                                                                             $2,663,000

 

Expenses

Salaries-officers

Janet Morton                                                                     $210,000

Kim Wong                                                                           210,000 $420,000

Salaries-clerical and sales                                                                                    580,000

Taxes (state, local, and payroll)                                                                        190,000

Repairs and maintenance                                                                                    112,000

Interest Expense:

Loan to purchase state bonds                                    $ 7,000

Other business loans                                                     174,000 181,000

Advertising                                                                                                                                46,000

Rental expense                                                                                                        86,000

Depreciation*                                                                                                           80,000

Charitable contributions                                                                                      30,000

Employee benefit programs                                                                                               48,000

Premiums on term life insurance policies

on lives of Janet and Kim; Pet Kingdom

is the designated beneficiary                                                                    32,000

Total expenses                                                                                                                                         (1,805,000)

Net Income before taxes                                                                                                                     $858,000

Federal income tax                                                                                                                                 (175,875)

Net income per books                                                                                                                           $682,125

 

*Depreciation for tax purposes is $110,000. You are not provided enough detailed data to complete a Form 4562 (depreciation). If you solve this problem using H&R Block Tax Software, enter the amount of depreciation on line 20 of Form 1120.

 

 

Balance Sheet

 

Assets                                                                           January 1, 2019                                 December 31, 2019

Cash                                                                              $ 960,000                                             $ 680,000

Trade notes and accounts receivable             1,650,000                                             1,838,000

Inventories                                                                                2,200,000                                             2,424,000

Stock Investment                                                    900,000                                 900,000

State bonds                                                                                300,000                                 300,000

Certificates of deposit                                          350,000                                 350,000

Prepaid Federal Tax                                                               -0-                                                          3,630

Buildings and other depreciable assets         4,365,000                                             4,365,000

Accumulated depreciation                                  (485,000)                                             (565,000)

Land                                                                              650,000                                 650,000

Other assets                                                              112,000                                 102,800

Total assets                                                        $11,002,000                                        $11,048,430

 

Liabilities and Equity                                             January 1,2019                                  December 31, 2019

Accounts Payable                                                    $ 1,850,000                                          $ 1,579,800

Other current liabilities                                        142,000                                 123,000

Mortgages                                                                  3,700,000                                             3,660,000

Capital stock                                                              2,000,000                                             2,000,000

Retained earnings                                                   3,310,000                                             3,685,630

Total liabilities and equity                          $11,002,000                                        $ 11,048,430

 

During 2018, Pet Kingdom made estimated tax payments of $44,876.25 each quarter to the IRS. Prepare a Form 1120 for Pet Kingdom for tax year 2019. Suggested software: H&R BLOCK Tax Software.