ACC 2460 – Fall 2003
Tax Return Project
Requirements
Professor Shelley Rhoades-Catanach
1.
Read and analyze the case facts. This is an individual effort, NOT a group effort.
2. Complete the following forms for the 2002 tax year: 1120 (all four pages), Schedule D,
4562, 4797. You need not complete form 4626 (Alternative Minimum Tax –
Corporations). Form 1120 and Schedule D and their instructions can be downloaded from the IRS website at http://www.irs.ustreas.gov/formspubs/index.html. Look for prior year forms to ensure that you get 2002 forms. Form 4562 and 4797 and their instructions can be downloaded from the course website. To download, you will need Acrobat
Reader. This is an individual effort, NOT a group effort .
3. You must turn in your completed forms at the beginning of class on December 4, 2003 .
You should also bring to class a copy of your completed forms for reference. During class, you will work in small groups to complete a set of tax forms for Hydromaint. Your group will turn in the group forms at the end of class. You will be graded on your group’s efforts in addition to your individual grade.
Case Facts
Hydromaint Inc. prepared the attached 2002 balance sheet and income statement in accordance with generally accepted accounting principles. In addition, the following information is available that might impact the calculation of 2002 taxable income:
1. During March of 2002, Hydromaint acquired new equipment with a total cost of
$100,000. This equipment is considered seven-year property under MACRS and is not listed property. Tax depreciation on the remainder of Hydromaint’s fixed assets, computed under MACRS, totals $790,000.
2. Dividend income on the income statement is from investments in several stocks.
Hydromaint owns less than 1% of the outstanding stock of any investee corporation.
3. Interest income on the income statement is from investment in City of Denver municipal bonds.
4. Bad debt expense was computed using the allowance method. Actual write-offs of uncollectible accounts during 2002 totaled $350,000.
5.
Hydromaint’s income statement reflects a gain of $10,000 on the sale of a business asset.
Hydromaint sold a pieces of equipment used in its business. The asset sold was held more than one year and is considered Sec. 1231 and Sec. 1245 property for tax purposes.
The equipment was sold for $50,000. It originally cost $100,000. Its accumulated book depreciation was $60,000, and its accumulated tax depreciation was $75,000.
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6.
Hydromaint’s income statement reflects total loss on sales of investment assets of
$(5,000). Detailed information for the assets producing this loss is as follows:
Stock
150 shares Clay Corp.
100 shares Gold Inc.
Date Acquired Cost Date Sold Sales Proceeds
7/2/94 $50,000 4/1/02 $75,000
4/2/98 50,000 11/6/02 20,000
7. During the year, Hydromaint was sued by a former employee for negligence. As part of its year-end audit, Hydromaint’s auditors determined that it was probable the company would be held liable for damages in this lawsuit. Included in “other current liabilities” on the balance sheet is a contingent liability of $120,000 representing Hydromaint’s expected damage payment. The related expense is included in “other operating expenses” on the income statement.
8. Hydromaint’s income statement reflects book income tax expense of $2,090,000, all of which is federal income tax expense. Hydromaint paid federal estimated tax payments totaling $2,000,000.
9. Hydromaint paid $2,500,000 of dividends to its shareholders during 2002. The corporation has earnings and profits greater than the current dividend distributions.
10. Hydromaint’s inventory is purchased for resale, and valued at cost. The rules of Sec.
263A do not apply to Hydromaint in valuing its inventory.
11. Hydromaint’s employer ID number is 98-7654321.
Assets
Cash
Hydromaint Inc.
Balance sheet as of December 31, 2001 and 2002
2001
Accounts receivable
2002
$ 435,309 $ 930,494
1,065,905 1,178,000
Less: allowance for bad debts
Merchandise inventory
Raw materials and work in process inventory
(118,200)
2,042,933
880,000
(178,200)
2,400,450
1,200,000
Supplies inventory
Investment assets
Land
Buildings and equipment
Less: accumulated depreciation
Other assets
Total Assets
75,521
120,000
350,000
167,000
75,000
350,000
5,117,286 4,967,286
(1,211,880) (1,891,880)
1,164,926 1,254,200
$ 9,921,800 $10,452,350
Liabilities and Equity
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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
$ 1,896,291 $ 1,000,500
15,000
214,659
921,170
15,000
221,000
906,170
208,000
700,000
2,987,000
2,979,680
208,000
700,000
2,987,000
4,414,680
$ 9,921,800 $10,452,350
Hydromaint Inc.
Statement of Income for the year ended December 31, 2002
Sales of goods and services $ 28,000,000
Cost of goods and services sold
Gross profit
Dividend income
Interest income
Loss on sale of investments
Gain on sale of business assets
Depreciation expense
(15,500,000)
12,500,000
90,000
5,000
(5,000)
10,000
(850,000)
Interest expense
Officers salaries
Salaries and bonuses paid to sales personnel
Salaries and wages paid to administrative personnel
Bad debt expense
Property taxes
State income taxes
Charitable contributions
Employee benefits
Premiums on key-man life insurance
Meals and entertainment expenses
Other administrative costs
Repairs and maintenance
Research and development
Income before taxes
Income tax expense (federal)
Net income
(500,000)
(600,000)
(700,000)
(500,000)
(410,000)
(400,000)
(150,000)
(50,000)
(250,000)
(50,000)
(150,000)
(770,000)
(395,000)
(800,000)
6,025,000
(2,090,000)
$ 3,935,000
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