Tax returns for pet kingdom, inc.

1. 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 [email protected]

• 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 2015, the corporation distributed cash dividends of $250,000.

Pet Kingdom’s financial statements for 2015 follow.

Income Statement

Income

Gross sales $5,750,000

Sales returns and allowances (200,000)

Net sales $5,550,000

Cost of goods sold (2,300,000)

Gross profit $3,250,000

Dividends received from stock investments in less-than- 20%-owned U.S. corporations 43,750

Interest income:

State bonds $15,000

Certificates of deposit 20,000 35,000

Total income $3,328,750 (continued)

 Expenses

Salaries—officers:

Janet Morton $262,500

Kim Wong 262,500 $525,000

Salaries—clerical and sales 725,000

Taxes (state, local, and payroll) 238,000

Repairs and maintenance 140,000

Interest expense:

Loan to purchase state bonds $ 9,000

Other business loans 207,000 216,000

Advertising 58,000

Rental expense 109,000

Depreciation* 106,000

Charitable contributions 38,000

Employee benefit programs 60,000

Premiums on term life insurance policies on lives of Janet Morton and Kim

Wong; Pet Kingdom is the designated beneficiary 40,000

Total expenses (2,255,000)

Net income before taxes $1,073,750

Federal income tax (356,023)

Net income per books $ 717,727 * Depreciation for tax purposes is $136,000. 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, 2015 December 31, 2015

Cash $ 1,200,000 $ 1,037,750

Trade notes and accounts receivable 2,062,500 2,147,000

Inventories 2,750,000 3,030,000

Stock investment 1,125,000 1,125,000

State bonds 375,000 375,000

Certificates of deposit 400,000 400,000

Prepaid Federal tax –0– 3,977

Buildings and other depreciable assets 5,455,000 5,455,000

Accumulated depreciation (606,000) (712,000)

Land 812,500 812,500

Other assets 140,000 128,500

Total assets $13,714,000 $13,802,727

Liabilities and Equity January 1, 2015 December 31, 2015

Accounts payable $ 2,284,000 $ 1,975,000

Other current liabilities 175,000 155,000

Mortgages 4,625,000 4,575,000

Capital stock 2,500,000 2,500,000

Retained earnings 4,130,000 4,597,727

Total liabilities and equity $13,714,000 $13,802,727

During 2015, Pet Kingdom made estimated tax payments of $90,000 each quarter to the IRS. Prepare a Form 1120 for Pet Kingdom for tax year 2015.  

 

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