Thomas Kassmieh
Thomas Li
Hu Jinglin
AC 350
Assignment #2
Spring 2022
The assignment is due by 2:00 pm on Thursday March 28, 2022. You can work with up to two other
people (total of three per group). Do not share your work with others or other groups.
Each person involved will receive an F for the course. Submit your solution via the assignment link
on BB. Your submission should consist of: (1) the completed excel file (one tab for the tax return
and one tab for the fixed asset calculations), (2) a word document with the supporting references
(calculations and explanations) of your book tax differences, and (3) a PDF of the two pages of the
corporate tax return. Be sure all group member names are listed in the excel and word file and at
least one group member's last name should be used in the file name of all three files (e.g. 'smith
workpaper.xlxs'; 'smith support.doc'; 'smith tax return.pdf').
Part 1:(40 points) Given the fixed asset information below calculate the 2021 tax depreciation
deduction for Forest, Inc. Additionally, calculate the current year gain or loss on sale of fixed assets
for tax purposes (N/A means not sold this year Forest still owns it). Be sure to indicate the
character of the gains and/or losses for proper inclusion on the tax return.
Assume all property purchased in 2021 is brand new. Forest, Inc, has not and will not use either
bonus depreciation or a section 179 deduction. The accumulated depreciation listed below is for
book purposes only assuming it is accurate (you do not need to recalculate book depreciation).
Purchase
Date
5/15/2011
4/29/2009
9/4/2013
5/4/2017
6/15/2021
8/27/2021
Sale Date
N/A
1/31/2021
3/19/2021
6/7/2021
N/A
N/A
Property
Description
Building
Land
Equipment
Furniture
Equipment
Furniture
MACRS
Life
39
N/A
5
7
5
7
§1231 activity for previous years is as follows:
Net §1231 Gain/Loss
prior to 2015
none
2015
10,000
2016
(25,000)
2017
6,000
2018
3,000
2019
(14,000)
2020
4,000
Book &
Tax Cost
750,000
250,000
35,000
49,000
400,000
175,000
Book AID
187,500
N/A
24,500
9,800
40,000
11,700
Sales
Price
N/A
245,000
8,000
32,000
N/A
N/A
Thomas Kassmieh
Thomas Li
Hu Jinglin
Part I Answer:
2021 Tax Depreciation Deduction
❖
❖
❖
❖
❖
Building (own: year 11): $750,000 x 2.564% = $19,230
Equipment (sold: year 9; HY): $0
Furniture (sold: year 5; HY): ($49,000 x 8.93%) x 50% = $2,187.85
Equipment (own: year 1; HY): $400,000 x 20% = $80,000
Furniture (own: year 1; HY): $175,000 x 14.29% = $25,007.50
⮚ Total 2021 Tax Depreciation Deduction: $126,425.35
Tax Based Accumulated Depreciation (A/D)
❖ Building
⮚ Year 1: $750,000 x 1.605% = $12,037.50
⮚ Year 2-11: $750,000 x 2.564% = $19,230/year = $192,300
▪ Total Tax A/D: $204,337.50
❖ Equipment (sold)
⮚ Year 1: $35,000 x 20% = $7,000
⮚ Year 2: $35,000 x 32% = $11,200
⮚ Year 3: $35,000 x 19.2% = $6,720
⮚ Year 4: $35,000 x 11.52% = $4,032
⮚ Year 5: $35,000 x 11.52% = $4,032
⮚ Year 6: $35,000 x 5.76% = $2,016
▪ Total Tax A/D: $35,000
❖ Furniture (sold)
⮚ Year 1: $49,000 x 14.29% = $7,002.10
⮚ Year 2: $49,000 x 24.49% = $12,000.10
⮚ Year 3: $49,000 x 17.49% = $8,570.10
⮚ Year 4: $49,000 x 12.49% = $6,120.10
⮚ Year 5: $49,000 x 8.93% = $4,375.70 x 50% = $2,187.50
▪ Total Tax A/D: $35,879.90
❖ Equipment (own)
⮚ Year 1: $400,000 x 20% = $80,000
▪ Total Tax A/D: $80,000
❖ Furniture (own)
⮚ Year 1: $175,000 x 14.29% = $25,007.50
▪ Total Tax A/D: $25,007.50
Thomas Kassmieh
Thomas Li
Hu Jinglin
2021 Gain/Loss for Tax Purposes
Equation: Amount realized – Adjusted basis
❖ Land: $245,000 - $250,000 = ($5,000); §1231 loss
❖ Equipment: $8,000 - $0 = $8,000; ordinary gain
❖ Furniture: $32,000 - $13,120.10 = $18,879.90; ordinary gain
Depreciation Recapture
❖ Equipment:
⮚ Amount realized: $8,000
⮚ Original basis: 35,000
⮚ Accumulated depreciation: 35,000
⮚ Adjusted basis: $0
⮚ Gain/(loss) recognized: 8,000
⮚ Ordinary income: $8,000
⮚ §1231 gain: 0
❖ Furniture:
⮚ Amount realized: $32,000
⮚ Original basis: 49,000
⮚ Accumulated depreciation: 35,879.90
⮚ Adjusted basis: $13,120.10
⮚ Gain/(loss) recognized: 18,879.90
⮚ Ordinary income: $18,879.90
⮚ §1231 gain: 0
Part 11:(60 points) Based on the facts and your calculations in Part I and those presented below,
prepare a federal Form 1120 for Forest, Inc. (You only need to complete page 1, and schedule M1). Begin with a workpaper (excel spreadsheet) summarizing the reconciliation of Forest, lnc.'s
book and tax income. The electronic trial balance and forms can be downloaded from Black Board.
Each (ALL) adjustment should be cross-referenced to a brief discussion (typed and professionally
presented in a Word document) of the reason for the adjustment along with the appropriate
supporting IRC section (for this assignment the only primary citation you will need is the IRC).
This is similar to the example in class except the description will be a more complete discussion
of the book and tax rules and written professionally in complete sentences. Do not create a
reference to accounts where you do not make a change. Your book-tax difference calculation
should also be included. Here is an example:
Use the following information to complete the return. Lastly, don't forget to review the trial balance
and see if any other adjustments are necessary.
Thomas Kassmieh
Thomas Li
Hu Jinglin
Part II Answer:
Facts:
For calendar year 2021, Forest, Inc. a C corporation uses the accrual method of accounting for
income tax and book purposes. Forest reported net income after taxes of $1,819,117 on its audited
financial statements. The corporation's books and records also reveal the following information, all
of which was considered in the computation of book income:
❖ Before making the adjustments necessary below, we need to begin by finding the reported
book income before taxes by adding back the federal income tax expense as this is
expensed for book purposes but not for tax purposes.
➢ Book Income Before Taxes: $1,819,117 + $900,000 = $2,719,117
1. Forest's reserve for bad debts as of January 1 was $20,000. Actual write-offs during the
year totaled $5,000, while the addition to the reserve for bad debts was $35,000. At
December 31 the balance in the account was $50,000.
Book-tax difference:
Item
Book (1)
Tax (2)
Difference (2 - 1)
Bad Debt Expense
($35,000)
($5,000)
$30,000 (Unfavorable & Temporary)
Bad Debts - §166(a)(2) states that debts considered to be partially worthless may be deducted to
the extent of the amount charged off during the year:
Bad Debt Expense:
Tax
($5,000)
Book - ($35,000)
M-1
$30,000
2. Forest established a legal reserve of $60,000. In the fall, Forest was sued by a consumer
group, which alleged that some of Forest's products contained carcinogenic substances.
Although the company's attorneys believe the suit to be meritless, the auditors insisted the
Forest establish a $60,000 reserve for contingent liabilities, accruing a $60,000 expense on its
books.
Item
Book (1)
Tax (2)
Difference (2 - 1)
Estimated Expenses
($60,000)
$0
$60,000 (Unfavorable & Temporary)
General rule for taxable year of deduction - §461(h)(5) states that a deduction for a reserve
for estimated expenses is not allowed. In the case of Forest, their legal reserve would not be
deductible.
Thomas Kassmieh
Thomas Li
Hu Jinglin
Estimated Expense Reserve:
Tax
$0
Book - ($60,000)
M-1
$60,000
3. Forest lost a lawsuit in 2021 and the $20,000 settlement is payable in 2022. The
expenses are included in the 2021 financial statements.
Item
Book (1)
Tax (2)
Difference (2 - 1)
Legal Expense
(20,000)
0
$20,000 (Unfavorable & Permanent)
Trade or business expenses - §162 (f)(3) states that any amount paid as a result of
court order in a lawsuit with no governmental entity as a party is deductible.
Nonetheless, §461(h)(2)(B) states that a liability cannot be incurred before economic
performance occurs. Economic performance occurs when the taxpayer provides the required
property or service. Since the settlement is payable in 2022, it is not deductible.
4. Forest owns an interest bearing municipal bond. The investment is in the City of Boston
General Fund and is not a private activity or arbitrage bond and is registered.
Item
Book (1)
Tax (2)
Difference (2 - 1)
Municipal Bond Interest
Income
$5,000
$0
($5,000) (Favorable & Permanent)
Interest on State and local bonds - §103(a) states that when one calculates their gross
income, they should not include any interest that derives from state or local bonds as these
bonds are considered to be tax exempt.
Municipal Bond Interest Income:
Tax
$0
Book - $5,000
M-1
($5,000)
5. Forest received the following amounts of dividend income from other corporations in the
current year:
$12,000 - Bentley, Inc. a German corporation in which Forest owns approximately 2% of the
Thomas Kassmieh
Thomas Li
Hu Jinglin
outstanding shares of stock
Item
Book (1)
Tax (2)
Difference (2 - 1)
Dividend-received Deduction
0
(6,000)
($6,000)
Dividends received by corporations - §243(a)(1) states that corporations will deduct any dividends they
receive by following the percentage guidelines given to them to calculate the correct dividend received
deduction. In this case the percentage will be 50% as this is not a dividend described in §243(2) or
§243(3).
Calculations:
Less than 20% ownership:
Dividend amount:
Dividend-received deduction:
50% (DRD Percentage)
x $12,000
$6,000
$10,000 - Blue and Gold Industries, a New York corporation in which Forest owns 1,000 of the
1,000,000 shares outstanding
Calculations:
Less than 20% ownership:
Dividend amount:
Dividend-received deduction:
50% (DRD Percentage)
x $10,000
$5,000
Dividend Deduction Limit for Both Dividends
Taxable Income (before DRD):
Dividend Deduction Percentage
Dividend Deduction Limit
$2,823,455
50%
$1,411,727.50
6. Depreciation - §167(a)(1) states that one should make a deduction for property used in a trade or
business for tax purposes.
Depreciation Deduction:
Tax $126,425.35
Book - $87,183
M-1 ($39,242.35) Favorable & Temporary
7. General Deductions - §805(a)(1) states that when one receives proceeds or benefits from insurance
claims, a deduction will be allowed.
FYI - §804 states that life insurance deductions are to be included within the general deductions
mentioned in §805.
Thomas Kassmieh
Thomas Li
Hu Jinglin
Life Insurance Proceeds:
Tax $0
Book - $100,000
M-1 ($100,000)
Favorable & Permanent
Thomas Kassmieh
Thomas Li
Hu Jinglin
Thomas Kassmieh
Thomas Li
Hu Jinglin