Tax Return Assignment #2 Preparation of tax returns and related schedules

Tax Return Assignment #2

Preparation of tax returns and related schedules can be very helpful in terms of integrating and applying tax concepts. To that end, please prepare the appropriate tax forms and schedules for the problem below. You may use the software provided with your textbook or prepare the forms by hand. Instructions for all forms and schedules may be obtained from the IRS website. A hard copy of your solution with schedules and forms in proper attachment order (stapled or clipped) is to be submitted by November 5^th. Check figure: Taxable Income (line 30)= $427,770.

§ On November 17, 2005, Casie Lynn and Kyle Allen formed LaBorne, Inc. to sell sporting goods. Pertinent information regarding LaBorne, Inc. is summarized as follows:

§ LaBorne Inc.’s business address is 2120 Rebecca Lane, Great Falls, Montana 59401; its telephone number is (575) 541-1122; and its email address is laborne@laborne.com.

§ The employer identification number is 11-1111111, and the principal business activity code is 451110.

§ Kyle is president of the company, and Casie is vice president.

§ Kyle and Casie are full-time employees of LaBorne, Inc. Kyle’s Social Security number is 123-45-6789, and Casie’s Social Security number is 987-65-4321.

§ LaBorne, Inc. is an accrual method, calendar year taxpayer. Inventories are determined using FIFO and the lower of cost or market method. LaBorne, Inc. uses the straight-line method of depreciation for book purposes and accelerated depreciation (MACRS) for tax purposes.

§ LaBorne, Inc.’s income statement for 2014 is shown on page 2.

§ LaBorne, Inc.’s balance sheet is as follows:

	January 1, 2014	December 31, 2014
Cash	1,200,000	1,750,243
Accounts receivable	2,062,500	2,247,000
Inventories	2,750,000	2,030,000
Stock investment	1,125,000	1,075,000
State of Montana bonds	375,000	375,000
Certificates of Deposit	400,000	400,000
Prepaid federal tax	0	3,977
Buildings and other depreciable assets	1,805,000	2,305,000
Accumulated depreciation	(727,000)	(1,602,000)
Land	812,500	812,500
Other assets	140,000	178,500
Total assets	9,943,000	9,575,220
Accounts payable	2,284,000	2,416,694
Other current liabilities	175,000	155,000
Mortgages	1,625,000	1,075,000
Capital stock	2,500,000	2,500,000
Retained Earnings	3,359,000	3,428,526
Total liabilities and equity	9,943,000	9,575,220

Income Statement
Income
Gross sales			5,900,000
Sales returns and allowances			(70,000)
Net sales			5,830,000
Cost of goods sold			(3,100,000)
Gross profit			2,730,000
Dividends			18,000
Interest income
State of Montana bonds	15,000
Certificates of deposit	27,500		42,500
Gain on sales of stock			8,000
Loss due to stock worthlessness			(27,000)
Other income			216,500
Total income			2,988,000
Expenses
Salaries and wages		805,000
Taxes (state, local, and payroll)		101,830
Interest expense
Loan to purchase municipal bonds	4,000
Funds borrowed for working capital	22,000	26,000
Warranty expense		9,300
Depreciation*		875,000
Charitable contributions		88,000
Premiums on key-man life insurance policies		10,000
Bad debt expense		9,800
Other expenses		435,000
Total expenses			(2,359,930)
Net income before taxes			628,070
Federal income tax			(213,544)
Net income per books			414,526

*You are not provided enough detailed information to complete a Form 4562 (depreciation schedule). If you solve this problem using H&R Block At Home, you will have to override the depreciation expense by entering the amount of depreciation on line 20 of Form 1120.

The following additional information is found in the tax working papers:

§ Dividends were from Hager Corporation, a less-than-20%-owned domestic corporation.

§ The stock sold for a gain was from David, Inc. LaBorne purchased the stock on 6/2/2013 for $32,000. The worthless stock was purchased on 3/20/2008 for $27,000 and was due to the bankruptcy of CLL, Inc.

§ Other income includes key officer life insurance proceeds of $150,000.

§ Included in the state, local and payroll tax expense total of $101,830 is $40,250 of state income tax and $61,580 of payroll tax.

§ For tax purposes, depreciation equals $930,000.

§ All contributions were paid in cash during the current year to Great Falls University.

§ Actual bad debts for the year were $10,500.

§ LaBorne, Inc. declared a $345,000 cash dividend during the current year.

§ During 2014, LaBorne, Inc. made estimated tax payments of $40,000 each quarter to the IRS.

§ Salaries and wages includes $200,000 paid to Mr. Allen and Ms. Lynn ($100,000 each).