Acc 2460 – Fall 2005
Prof. Stiner
Tax Return Project
Tax Return Project
Molded Steel Products, Inc,, is a calendar-year, accrual method taxpayer who prepared the
attached 2005 balance sheet and income statement in accordance with generally accepted
accounting principles. In addition, the following information is available that might affect the
calculation of 2005 taxable income:
1.
The dividend income earned by Molded Steel Products resulted from investments in
several stocks. Molded Steel Products owns less than 5% of the outstanding stock of any
single investee corporation.
2.
Depreciation on Molded Steel Products’ fixed assets, computed under MACRS, totals
$578,433. No fixed asset acquisitions occurred during 2005.
3.
Detail for selling and administrative expenses of $8,982,535 reported on the income
statement is as follows:
Officers salaries
$673,893
Salaries and bonuses paid to sales personnel
1,869,755
Salaries and wages paid to administrative personnel
637,995
Bad debt expense
975,846
Property taxes
842,750
Charitable contributions
350,000
Employee benefits
693,201
Premiums on key-man life insurance
563,259
Meals and entertainment expenses
505,110
Other administrative costs
988,108
Repairs and maintenance
882,618
Total
$8,982,535
4.
Bad debt expense included in #3 above was computed using the allowance method.
Actual write-offs of uncollectible accounts during 2005 totaled $1,007,000.
5.
Molded Steel Products’ income statement reflects total loss on investment assets of
$14,000. Detailed information for the assets producing this loss is as follows:
Stock
150 shares Clay Corp.
100 shares Mudd Inc.
100 shares Raine Corp.
500 shares Mixx Inc.
Date Acquired
7/7/1999
4/2/2000
6/16/1993
7/15/2005
Date Sold
4/2/2005
11/6/2005
11/12/2005
See Note
Sales Proceeds
$70,000
45,000
17,000
See Note
Cost
$40,000
60,000
25,000
75,000
Note: The stock investment in Mixx Inc. was classified as a trading security for financial
reporting purposes. Its fair market value on 12/31/2005 was $54,000. As a result, an
1
Acc 2460 – Fall 2005
Prof. Stiner
Tax Return Project
unrealized loss of $21,000 is included in the income statement in accordance with GAAP.
6.
Molded Steel Products’ income statement reflects a gain of $45,000 on the sale of
business assets. On August 28, 2005, Molded Steel Products sold equipment used in its
business for $460,000. The equipment was originally acquired on November 4, 2002 at a
cost of $750,000, and $335,000 of depreciation had been taken on the equipment for
book purposes. For tax purposes, accumulated depreciation under MACRS prior to sale
totaled $575,000. The assets sold are considered Sec. 1245 property for tax purposes.
This sale was not reported on a 1099-B or 1099-S.
7.
Molded Steel Products’ income statement reflects income tax expense of $771,308. Of
this amount, $578,000 is federal income tax expense, and the remainder is state income
tax expense. Molded Steel Products paid federal estimated tax payments totaling
$800,000, and state estimated tax payments of $600,000.
8.
Molded Steel Products declared and paid $352,900 of cash dividends to its shareholders
during 2005. The corporation has earnings and profits greater than the current dividend
distributions.
9.
All relevant lines of Form 1120 Schedule A must be completed. There is no cost of labor
or other costs attributed to Cost of Goods Sold. The value of purchases made (Line 2)
must be determined by backing into the number. Although we would NEVER back into
Purchases in real life, the ability to back into a number is a valuable skill. This gives you
some practice.
10.
Molded Steel Products’ inventory is purchased for resale, and valued at cost. The rules
of Sec. 263A do not apply to Molded Steel Products in valuing its inventory. Molded
Steel had no sales returns or allowances in 2005. Molded Steel uses the FIFO method of
inventory valuation for book and tax. There were no changes in inventory methods or
valuation this year.
11.
Molded Steel Products’ employer ID number is 98-7654321. The mailing address for
Molded Steel Products, Inc. is 4231 Gov. Richie Highway, Arnold MD 21012.
12.
The President of Molded Steel is John Hammer (SSI #345-67-8901). The Vice-President
and Secretary of Molded Steel is Wen Tong (SSI# 789-01-2345). The Treasurer of
Molded Steel is Greta Pound (SSI# 234-56-7890). Ms. Pound signs the tax return after it
is prepared. The President earns 40% of the officers’ compensation listed in #3 above.
The other officers earn 30% each. All devote 100% of their time to the business. The
President owns 40% of the common and 40% of the preferred stock. The other two
officers each own 30% of the common and 30% of the preferred stock. All the officers
are US citizens and residents. Molded Steel does not supply any vehicles for the use of
any of its employees.
2
Acc 2460 – Fall 2005
Prof. Stiner
Tax Return Project
13.
Molded Steel Products, Inc. manufactures specialty products made from stainless steel
and sells the products to other companies. Molded Steel Products has occasionally
supplied Hydromaint, Inc., with certain items. Neither Molded Steel Products nor
Hydromaint are VIEs (Variable Interest Entities). There is no need to combine financial
statements, or to file a consolidated tax return.
14.
This is the sixth year of Molded Steel Products’ operations. This is not its final year of
operation. It was incorporated on Jan. 2, 2001 in Delaware. In the real world, Molded
Steel would be required to file an M-3. In this tax project Molded Steel is not required to
file an M-3. Do not check the box labeled A-4. Molded Steel has never had an NOL.
15.
All values entered into any cell in any tax form or schedule should be rounded to zero
decimal places. Don’t mess with pennies. It’s not material, as the auditors say.
16.
All of the Retained Earnings are unappropriated.
Required:
1.
Read and analyze the case. This is an individual effort, NOT a group effort.
2.
Complete the following forms for Molded Steel Products for the 2005 tax year: 1120 (all
four pages), 1120 Schedule D, 4562, 4797. You need not complete Form 4626
(Alternative Minimum Tax – Corporations) nor Schedule M-3. Forms 4562, 4797, their
related instructions and the instructions for Form 1120 can be downloaded from the IRS
website. Be sure to get year 2005 draft forms for Form 1120 and Form 4562. You
can find the draft forms at http://www.irs.gov/taxpros/lists/0,,id=97782,00.html.
The 2005 version of Form 4797 and its instructions are available now at the usual IRS
location: http://www.irs.gov/formspubs/lists/0,,id=97817,00.html.
Form 1120 Schedule D is scheduled to be released and found in the usual location on
Dec. 2. Use that form if possible, because it will be interactive. The draft Form 1120
Schedule D is not interactive and must be filled in by hand. You may use either the 2004
or the 2005 version of Form 1120 Schedule D without affecting the points on your
project. The 2004 version is interactive.
Form 4562 and its instructions are scheduled for release and posting in the usual
location on Dec 5. Use that form if you can because it will be interactive.
The IRS posts a schedule of draft form release dates. The schedule may have to be
modified, so don’t stake your life on a particular form’s release date.
You must use the 2004 version of the instructions for the Form 1120 and its Schedule D.
They are also obtained from the usual location, listed above.
3
Acc 2460 – Fall 2005
Prof. Stiner
Tax Return Project
To download from the IRS website, you will need Acrobat Reader. If it is not already
loaded on your computer, it can be downloaded from the following website:
http://www.adobe.com/products/acrobat/readstep.html. This is an individual effort,
NOT a group effort.
3.
You must sign the Form 1120 on page 1 in the section entitled, Paid Preparer’s Use Only.
Do NOT include your real social security number. Leave the SSN and EIN spaces blank.
4.
You may consult me at any time before the due date, including during class, with
questions about the project. You may not consult anyone else. This is an individual
effort, not a group effort.
5.
Turn in your completed forms at the beginning of class on Thursday, Dec 8. You will
receive a grade for your individual effort on the tax forms. You must also bring to class
a copy of your completed forms for your reference. During class, you will work in a
group to complete a set of tax forms for Molded Steel Products. I will provide the blank
returns for the group and feedback questions. The members of each group will work out
the differences, if any, in the members’ individual Molded Steel Products returns. The
group tax return will be the consensus of the group. You will be graded on your group’s
efforts in addition to your individual grade. Your final score in the tax return project will
be weighted as 25% your individual score and 75% the group score. At the end of class
on Dec 8, your group will make a very short, informal oral presentation on the feedback
questions.
4
Acc 2460 – Fall 2005
Prof. Stiner
Tax Return Project
Molded Steel Products
Statement of Income for the year ended Dec 31, 2005
Sales of goods and services
$38,040,444
Dividend income
84,261
Gain on sale of business assets
45,000
Loss on sale of investment
(14,000)
Cost of goods sold
(23,204,671)
Depreciation expense
(660,926)
Interest expense
(502,672)
Selling and administrative expenses
(8,982,535)
Research and development
(2,233,874)
Income before taxes
2,571,027
Income tax expense
(771,308)
Net income
$1,799,719
Molded Steel Products, Inc.
Balance sheet as of December 31,
Assets
Cash
Accounts receivable
Less: allowance for bad debts
Merchandise inventory
Raw materials and work in process inventory
Supplies inventory
Other long term investment assets
Land
Buildings and equipment
Less: accumulated depreciation
Other assets
Total Assets
645,115
2,907,531
(76,300)
3,133,054
3,729,171
205,857
101,919
1,036,128
7,996,663
(1,709,983)
1,996,463
$19,965,618
692,432
2,895,748
(75,800)
3,939,436
3,815,878
295,790
182,654
1,036,128
8,098,799
(1,830,526)
2,308,067
$21,358,606
Liabilities and Equity
Accounts payable
Current portion of long-term debt
Other current liabilities
Long-term payables
Common stock
Preferred stock
Additional paid-in capital
Retained earnings
Total Liabilities and Equity
2004
$98,018
15,000
48,306
342,848
208,000
700,000
2,987,000
15,566,446
$19,965,618
2005
$90,307
15,000
38,097
306,937
208,000
700,000
2,987,000
17,013,265
$21,358,606
5
2004
2005