The Snap-It-Open Corporation incorporated and began operations

APPENDIX D
TAX RETURN PROBLEMS
TAX RETURN PROBLEM 1 (TRP 1 )
CORPORATE TAX RETURN PROBLEM
The Snap-It-Open Corporation incorporated and began
operations on January 15 of the current year. Its address is 3701 Commerce
Drive, Baltimore, MD 23239. Its employer identification number is 69-7414447.
It elects to file its initial tax return as a calendar-year corporation and
uses the accrual method of accounting. It elects the FIFO method of inventory
valuation. JasoriSPrull (SSN 333-33-3333) and Martin Winsock (SSN 555-55-5555)
formed the business. They each contributed $250,000 cash for 50 percent of the
100,000 shares of $1 par value stock issued and outstanding. The company was
formed to assemble and market a unique, compact, snap-open umbrella and its
business activity code is 339900. These umbrellas are sold to a variety of
organizations as premiums. The company purchases the umbrella frames and
several types of waterproof fabric for the umbrella material and cov-ers from
various manufacturers. It prints the organizations’ advertising logos or other
designs on the umbrella material and covers. It then assembles these on the
umbrella frames for delivery to the customer along with the covers. On January
16, the company placed in service two new machines that they had purchased for
$250,000 each for printing and cutting the fabric for the umbrellas and two
used umbrella assembly machines purchased for $200,000 each. The company
obtained a bank loan of $750,000 secured by the machines. Jason and Martin were
required to personally guarantee this loan that has an 8 percent annual
interest rate on the unpaid balance. The first principal and inter-est payment
of $160,000 is not due until January 16 of next year. During the year, the
company purchased $150,000 of fabric and $210,000 of umbrella frames. It
returned one order of frames valued at $5,000 because of a defect in the
snap-open mechanism and received a cash refund for that amount. Both Jason and
Martin worked full-time in the business. Jason was the sales-person for the
company and Martin managed the office and the printing and assembly operations.
Each received a salary of $60,000 for the year. They had six employees with the
following incomes for the year: $45,000 for an accountant; $21,000 for a
receptionist; $28,000 for each of two print machine operators; and $25,000 for
each of two assembly machine operators. There are no accrued salaries or taxes
as of the end of the current year. FUTA taxes are assessed on the first $7,000
of wages at a rate of 6.0 percent. During the year, the company had $1,535,000
in umbrella sales and collected $1,180,000 on these sales. They also paid the
following expenses in cash:
Rent $240,000
Repairs and Maintenance 20,000
Utilities 80,000
Taxes and Licenses (excluding FICA and FUTA taxes) 10,000
Health Insurance
16,000
Advertising 40,000 Travel (excluding meals) 20,000
Meals and
Entertainment 15,000
Group Term Life Insurance 2,000

As an accrual-basis taxpayer, the company recognized $57,500
in interest expense on the note ($750,000 x .08 x 11.5/12) and established an
allowance account for bad debts equal to two percent of sales. They recognized
depreciation expense for financial accounting equal to 10 percent of the
purchase price for the new printing machines and 12.5 percent of the purchase
price for the used assembly machines. Their inventory at year-end consisted of
$15,000 of fabric and $18,000 of umbrella frames based on the FIFO inventory
method. (For simplicity, you are only required to allocate the factory salaries
to the calculation of cost of goods sold.) The company made estimated tax
payments of $40,000 for the year. Required Part a. Prepare a financial
accounting income statement (before income tax) and balance sheet for
Snap-It-Open Corporation for the current year. (Do not forget to compute FICA
and FUTA taxes for all employees.) Part b. Complete a Form 1120 and Form 4562
for Snap-It-Open Corporation using the following additional information. The
corporation wrote off no bad debts for the year and it maximized its cost
recovery deductions on the four machines purchased. Use the latest available
tax forms from the IRS Web site at www.irs.gov.
TAX RETURN PROBLEM 2 (TRP 2)
PARTNERSHIP TAX RETURN PROBLEM
The Rite-Way Plumbing Company began business three years ago
as of March 1 of the current tax year in Sarasota. Its business address is 124
Division Lane, Sarasota, FL 33645. Its employer identification number is
69-3456789. Its princi-pal business activity is residential plumbing repairs
and maintenance; its business code is 238220. It files its income tax returns
on the calendar-year basis. The business was formed as a limited partnership by
two brothers, John Henry (SSN 555-55-5555) and James Henry (SSN 666-66-6666),
who work full-time in the business, and their father Tom Henry (SSN
888-88-8888), the limited partner. The brothers each have a 25 percent interest
in the income, loss, and cap-ital of the business while their father owns a 50
percent interest in income, loss, and capital, but takes no active interest in
the business other than as that of an investor. At the end of the current year,
its operations showed cash gross receipts of
$1,240,000 and the following cash expenditure items:
Salaries and wages (excluding John and James) Repairs and Maintenance Rent
Taxes and Licenses Advertising Pension Plans (excluding John and James) $378 2,000
28,000 3 000 183 , 0070 15,000 Health/Dental Insurance 16,000 Material
Purchases 220,000 Truck Expense 45,000 Insurance (excluding health/dental)
65,000 Legal/Professional Fees Office
Expenses 63,000000 Utilities/Telephone 8,000 Meals/Entertainment 4,000
Draw—John 75,000 Draw—James 60.000 Total Cash Expenditures $966,000