Tax Return problem – John Parsons and George Smith (Solution)

TAX RETURN PROBLEM1. John Parsons (123-45-6781) and George Smith (123-45-6782) are 70% and 30% owners, respectively, of Premium, Inc. (11-1111111), a candy company located at 1005 16th Street,Cut and Shoot, TX 77303. The company’s S corporation election was made on January15, 2007. The following information was taken from the income statement for 2012.Interest income $ 100,000Gross sales receipts 2,410,000Beginning inventory 9,607Direct labor (203,102)Direct materials purchased (278,143)Direct other costs (249,356)Ending inventory 3,467Salaries and wages (442,103)Officers’ salaries (150,000)Repairs (206,106)Depreciation expense (15,254)Interest expense (35,222)Rent expense (operating) (40,000)Taxes (65,101)Charitable contributions (cash) (20,000)Advertising expenses (20,000)Payroll penalties (15,000)Other deductions (59,899)Book income 704,574A comparative balance sheet appears below.January 1, 2012 December 31, 2012Cash $ 47,840 $ ?Accounts receivable 93,100 123,104Inventories 9,607 3,467Prepaid expenses 8,333 17,582Building and equipment 138,203 185,348Accumulated depreciation (84,235) (?)Land 2,000 2,000Total assets $214,848 $844,422Accounts payable $ 42,500 $ 72,300Notes payable (less than 1 year) 4,500 2,100Notes payable (more than 1 year) 26,700 24,300Capital stock 30,000 30,000Retained earnings 111,148 ?Total liabilities and capital $214,848 $844,422Premium’s accounting firm provides the following additional information.Distributions to shareholders $100,000Using the preceding information, prepare a complete Form 1120S and ScheduleK–1s for John Parsons and George Smith, 5607 20th Street, Cut and Shoot, TX 77303.If any information is missing, make realistic assumptions.