ACCT 5315 – Comprehensive Case #2
Due: December 19, 2013
Security Monitoring Services
Attached to this case are the comparative balance sheets for Security Monitoring Services for calendar
years 2012 and 2013. In addition, the profit and loss statement for 2013 is provided. Based on the
financial statements and the information provided below, prepare answers for the following requirements.
Security monitoring services reports its tax information on the accrual basis of accounting.
Facts and Other Information
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Employee morale expense consists of various on site meals and entertainment to keep the
employees morale up and in a positive momentum. The meals are such that 25% of the amounts
are fully deductible and the remaining 75% are subject to the meals and entertainment limitations.
Included in the owners salary account and accrued payroll account is an accrued bonus of
$350,000. At this juncture, no accrual for FICA taxes on the bonus has been made. Due to cash
constraints, the officer’s were told that the bonus payments would not be paid until the June 1,
2014 paycheck. There was no accrued officer payroll in 2012.
Included in vehicle expenses category in the general and administrative section are lease payments
from 6 leased vehicles. All are BMA SUVs weighing less than 6,000 pounds. The vehicles were
all leased in January 2012 and had a market value of $60,500 at the time of acquisition. The
leases are operating in nature. As such, they are not included in the balance sheet of the company.
Included in the fringe benefits are life insurance premiums on officer’s (or partner’s in the case of
an LLC) lives where the company is the beneficiary. The amount of these premiums is $24,000
for calendar year 2013.
The company has a charitable contributions carryover from 2013 of $90,500.
Also included in COGS fringe benefits is an accrual for other post employment benefits (See
SFAS 106) for which no actual contribution to fund the accrual is necessary nor is made. The
amount is $48,450.
The company chose to have book and tax depreciation be equal. However, now that the company
is making a profit, they have decided to maximize depreciation for tax, but use straight-line
depreciation over the tax useful life along with the proper convention (i.e., half year, mid quarter
or mid month) for book. The following asset acquisitions were all made on 6/30/2013. :
3 Vehicles each costing
Machinery and Equipment:
Office Equipment:
Computer and Network System:
Leasehold Improvements:
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$32,750
$83,900
$492,600
$361,050
$72,600
In year 2011, the company acquired many smaller companies giving rise to substantial goodwill as
shown on the balance sheet. No amortization has been taken for book purposes in 2013 or 2012 in
accordance with GAAP that require no adjustment if no impairment of goodwill has occurred.
Included in the revenue figure is $3,500,000 of proceeds received by the company on the death of
its former director (a non-owner) who was covered by a life insurance policy paid for by the
company.
The company bills in advance. Because of the rules in place regarding the claim of right doctrine,
and how it commingles funds when paid in advance, the IRS requires that the company take into
income any advance payments of revenue that are not earned in the current year (Hint..check the
change in the deferred revenue account.
In 2012, the company applied for and was granted by the Internal Revenue Service a change in
accounting method from the cash basis to the accrual basis. The change resulted in a total Section
481(a) positive adjustment to income of $800,000. Sec. 481(a) allows this adjustment to be spread
over 4 years (the year of the change and 3 subsequent years).
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The company is not a member of a controlled group and is not entitled to any tax credits.
The entity does not own more than 2% of the stock of any other company.
This is a closely held business owned equally by 3 American citizens: Walter White, Jesse
Pinkman, and Gus Fring. Upon creation of the business in 2010, each owner contributed 1/3 of the
total $500,000 used to form the entity.
Each owner received an equal share of the total cash distributions on 12/31/ 2013 of $500,000 all
of which is paid out of earnings and profits.
The entity does not own any interest in other partnerships or LLCs
This entity neither qualifies as a tax shelter nor does it have any interests whatsoever in foreign
countries.
Make up any and all social security numbers and addresses as needed. Assume the entities
employer identification number is 11-3425647
No accrual for current Federal Income Taxes payable by the entity has been made on the
financial statements. Please make the adjustment to the profit and loss statement and
balance sheet where appropriate. No recording of any deferred tax asset or liability is
required for this assignment despite the fact that one would exist for this company.
Required
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2.
3.
4.
5.
6.
Assuming this entity is a C corporation, compute the firms total effective corporate tax
liability and average tax rate (total taxes / book profit before taxes). Total corporate tax
liability is calculated as the sum of: 1) the corporate taxes calculated on the Form 1120 add to:
2) the dividend taxes paid by each of the owners on the corporate dividend received in 2013
added to 3) the taxes paid by each owner on their cash salary received in 2013. Assume each
owner is a single taxpayer and had total 2013 AGI of $300,000 comprised only of their firm
salary. Further assume none of the owners have any itemized deductions. Also, prepare in
good form, Federal Form 1120 pages 1-5 for the above entity. As part of your answer be sure
to fully explain your computation of schedule M-1: Group 2 presents
Assume instead this entity is a Limited Liability Company that qualifies for taxation as a
partnership under Subchapter K. Please prepare pages 1-5 of Form 1065 (EXCLUDING
SCHEDULE M-1) and the form k-1s for each owner. Prepare an analysis that 1) reconciles
and explains the differences between corporate taxable income from page 1 of Form 1120 and
ordinary income from page 1 of Form 1065. For example, if a revenue item is included in
corporate taxable income on Form 1120, but is not included on page 1 of Form 1065 because
it is separately stated on Schedule K, you will want to show that as an adjustment in your
analysis and explain why.
Again assume that this entity is an LLC. Calculate the total tax liability (income and self
employment tax) each LLC member will be required to pay because of including their share
of firm profits and separately stated items. To do this, assume that each partner is a single and
cannot itemize their deductions. Please note that entities taxed as partnerships do not pay
salaries to their owners. Instead, any salary like payment to an owner is called a guaranteed
payment which is deducted in the computation of ordinary income on page 1 of form 1065
and is reported to each owner on their respective K-1 for the year. The guaranteed payments
(also self employment taxable) are added to the other K-1 items and included in each owner’s
tax return. Thus, assume that the only taxable income items each owner will have for 2013
are those reported to them on the K-1 for this entity. Presenter: Group 4
Prepare a memorandum briefly explaining the definition and rationale of the following key
state income tax concepts: 1) Nexus, 2) Allocation versus apportionment (be sure to explain 3
v. 4 factors) and 3) Throwback rules.
Prepare a memorandum explaining the distinction between ordinary dividends and qualifying
dividends and the implications this have for Income Tax Purposes.
Prepare a memorandum explaining the new surtax on Net Investment Income that was
enacted starting 2013. Group 6 presents parts 4, 5, 6
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Security Monitoring Services
Income Statement
For fiscal year ending 12/31/2013
2013
Revenue
$18,249,836
Cost of Goods Sold
COGS – Payroll
COGS - Payroll Tax Expense
COGS - Fringe Benefits - Health Ins
Total Cost of Labor
$ 8,401,249
$ 239,474
$ 191,934
$ 8,832,658
Other Costs
Recruitment Expenses
Vehicle Expenses
Equipment Operating Leases
Licenses and Permits
Pager Expense
Advertising Expense
Report Administration Expense
Printing Expense
Office Expense
Computer Support and Maintenance
Network Maintenance
Freight In
Mobile/Land Telephone
Employee Morale Expenses
Travel
Business Meals (50%) ded
Dues and Subscriptions
Depreciation Expense
Radio Monitoring Expense
Education Expenses
Total Cost of Sales
$
25,931
$
60,949
$
23,496
$
19,373
$
61,773
$ 111,973
$
13,516
$
12,855
$
22,909
$
58,365
$
30,039
$
276
$ 1,228,390
$
51,825
$
51,202
$
5,888
$
1,514
$ 228,095
$ 135,685
$
10,477
$10,987,191
Gross Profit
$ 7,262,645
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Gross Profit
$ 7,262,645
Payroll
Owners Salary (split evenly among owners)
Recruitment Expense
Payroll tax expense
Health Insuracne
Vehicle Expense and auto repairs
Depreciation
Trade shows
Postage and Freight
Professional Fees
Insurance
Rent Expense
Office expense
Network Maintenance Expense
Dues and Subscriptions
Employee Morale Expense (50%)
Mobile Phone
Legal Expenses and Consulting fees
Credit Card Fees
Travel net of meals
Business Meals (50%)
Payroll Processing
New York State Taxes
401(K) Expense
Training
Office Equipment leases and expense
Total Other Expenses
$ 749,117
$ 1,250,000
$
581
$
36,123
$
42,941
$
93,261
$
25,221
$ 220,167
$
64,923
$
5,695
$ 127,377
$ 204,208
$
62,713
$
11,627
$
14,373
$
56,796
$
26,198
$ 226,165
$
22,109
$ 108,612
$
26,263
$
8,081
$
887
$
13,951
$
528
$
42,140
$ 3,440,057
Amortization
Bad Debt expense
Interest expense
Net capital loss
State of Texas Municipal Interest
Dividend Income
$
$
$
$
$
$
Net Income per books before taxes
$ 3,779,837
24,825
26,847
122,450
(15,921)
(115,449)
4
Security Monitoring Services
Balance Sheet
as of 12/31/2013 and 12/31/2012
2013
2012
Cash
A/R
Less: Allowance for D/A
Security Deposits
Office Equipment (f & f)
Accum Depreciation (f& f)
Machinery and Equpiment
Accum Depreciation
Leasehold Improvements
Accum Deprec
Computers and Networks
Accum Depreciation
Vehicles
Accumulated Depreciation
Goodwill
Accum Amort
Investment Account
$
91,964
$ 997,007
$ (17,450)
$
16,202
$ 622,900
$ (162,269)
$ 378,297
$ (238,146)
$ 103,280
$ (33,089)
$ 428,524
$ (149,951)
$ 130,628
$ (15,620)
$ 1,250,000
$ (62,500)
$ 5,697,531
$
74,602
$ 751,264
$
(4,477)
$
16,202
$ 130,300
$ (101,847)
$ 294,397
$ (197,662)
$
30,680
$ (29,695)
$
67,474
$ (13,495)
$
32,378
$
(3,060)
$ 1,250,000
$ (62,500)
$ 887,409
Total Assets
$ 9,037,308
$ 3,121,971
Liabilities
Accounts payable
Accrued Payroll
Current Portion Debt
OPEB Liability (deducted in fringe bene)
Accrued Expenses
Deferred Revenue
Total Current Liabilities
Long Term - Notes Payable
Total Liabilities
$ 445,098
$ 392,334
$
56,276
$
88,450
$ 105,236
$ 528,334
$ 1,615,728
$ 3,116,345
$ 4,732,073
$ 297,022
$
91,597
$
6,240
$
40,000
$
7,507
$ 336,690
$ 779,055
$ 1,317,518
$ 2,096,573
Equity
Common Stock
Retained earnings
C/Y Profit Loss
Paid In Capital
Distributions to Owners (split evenly)
Total Equity
$
5,000
$ 525,398
$ 3,779,837
$ 495,000
$ (500,000)
$ 4,305,235
$
5,000
$(1,172,285)
$ 1,697,683
$ 495,000
$
$ 1,025,398
Total Liabilities and Equity
$ 9,037,308
$ 3,121,971
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