The Snap-It-Open Corporation incorporated

The Snap-It-Open Corporation incorporated and began operations on January 15, 2002. Its address is 3701 Commerce Drive, Baltimore, MD 23239. Its employer identification number is 69-7414447. It elects to file its initial tax return for 2002 as a calendar-year corporation and uses the accrual method of accounting. It elects the LIFO method of inventory valuation.Jason Sprull (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 covers from various manufacturers. It prints the organizations’ advertising logos or other designs on the umbrella material and covers and then assembles these on the umbrella frames for delivery to the customer.On January 16, the company began using two machines for printing and cutting the fabric for the umbrellas that they had purchased for $250,000 each 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 principle payment of $100,000 is not due until January 16, 2003.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 salesperson for the company and Martin managed the office and the printing and assembly operations. Each received a salary of $60,000 for 2002. 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 December 31, 2002. FUTA taxes are assessed on the first $7,000 of wages at a rate of 6.2 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 $240,000Repairs & maintenance 20,000Utilities 80,000Taxes & licenses (excluding FICA and FUTA taxes) 10,000Health insurance 16,000Advertising 40,000Travel (excluding meals) 20,000Meals & entertainment 15,000Group term life insurance 2,000As 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 LIFO inventory method. (For simplicity, you are only required to allocate the factory salaries to 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 as of December 31, 2002. (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. Tax forms can be downloaded from the IRS web site at: www.irs.go