Dimensions, Inc.
Federal Tax Return
FACTS –
Dimensions, Inc. is owned by Tony P. Carter and his wife, Nicki M. Carter. The corporation manufactures
specialty goggles used for playing virtual reality games. These goggles encircle the player’s head and allow for
three-dimensional viewing. The corporation (business activity code number 334310), has reported positive
financial and taxable incomes since inception. The company is located at 1000 S. Main St., Omaha, Nebraska
23456. The company’s employer identification number is 35-6594321, and the calendar year is used for tax
purposes. The date of incorporation was February 1, 1997.
Tony P. Carter (social security number 232-01-9119) is an 80 percent shareholder and president of the company.
Nicki M. Carter (social security number 321-09-7768) is a 20 percent shareholder and vice president of the
company. Both persons devote 100 percent of their time to the corporation. Tony’s compensation is $125,453
per year, and Nicki’s compensation is $69,696 per year.
The corporation files its tax return on the accrual method. Inventory has been consistently valued at cost under
the FIFO method using the full absorption procedure. Inventory capitalization rules of Internal Revenue Code
Section 263A do not apply due to the ‘small business exception’ (average annual gross receipts for the three
preceding taxable years do not exceed $10 million). The accounting records are computerized.
The corporation’s audited income statement and balance sheet for the current year, prepared by the accounting
firm of Laurel & Hardy, CPAs, are as follows:
DIMINENSIONS, INC.
INCOME STATEMENT
For the Year Ending December 31, 2001
Revenue:
Sales (net)
Cost of goods sold
$5,599,281
(4,665,041)
Gross profit
$934,240
Operating expenses:
Compensation of officers
Other salaries and wages
Rental expense
Interest expense
Fines for improper disposal of waste
Advertising
Contributions
Bad debt expense
Depreciation expense
Taxes
Repairs and maintenance
Miscellaneous expenses
Total operating expenses
$195,149
429,279
29,410
74,413
2,370
7,499
31,363
2,788
96,116
67,605
6,282
16,973
$(959,247)
Net Income from Operations
$(25,007)
Other income and loss:
Dividend income
Interest income
Loss on sale of investment in stock
Net Income (Loss) before income tax
Income tax expense
Net Income
$93,174
2,039
(2,231)
92,982
$67,975
(2,789)
$65,186
DIMINENSIONS, INC.
STATEMENT OF FINANCIAL POSITION
December 31, 2001
Beginning
of Year__
End
of Year
Current Assets:
Cash & Marketable Securities
Accounts receivable
Allowance for Doubtful Accounts
Inventory
Total current assets
$410,045
198,006
(12,546)
453,693
$1,049,198
$399,182
223,428
(14,950)
549,239
$1,156,899
Machinery, Building and Land:
Machinery
Less: Accumulated depreciation
Building:
Less: Accumulated depreciation
Land:
Total equipment, building and land (net)
$271,815
(83,635)
958,922
(115,297)
69,696
$1,101,501
$310,496
(152,355)
958,922
(142,693)
69,696
$1,044,066
-0$2,150,699
20,386
$2,221,351
ASSETS
Other assets:
Goodwill
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Notes payable (less than one year)
Total current liabilities
$178,702
143,574
$322,276
$192,270
126,846
$319,116
Notes payable (one year or more)
Total Liabilities
676,051
$998,327
727,190
$1,046,306
Common stock (11,000 shares authorized,
6,336 shares issued and outstanding, $100 par)
Additional paid-in capital
Retained earnings
Total Shareholders’ Equity
$633,600
202,752
316,020
$1,152,372
$633,600
202,752
338,693
$1,175,045
Total Liabilities and Shareholders’ Equity
$2,150,699
$2,221,351
STATEMENT OF RETAINED EARNINGS
Beginning Retained Earnings
Net Income for the year
Dividends paid in cash
Ending Retained Earnings
$316,020
65,186
(42,513)
$338,693
ADDITIONAL INFORMATION –
1. Dimensions, Inc. made estimated tax payments attributable to 2001 of $4,182. The corporation also had a
credit from an overpayment of its prior year Federal income taxes of $377 that it elected to apply against
its 2001 tax liability.
2. Dividend income is from the following sources:
Video Tron (<5% ownership)
Yahoo (<5% ownership)
Wireless Corp. (Dimensions, Inc. Owns 60% of Wireless
Corp.’s stock)
Total
$54,841
20,909
17,424
$93,174
3. An analysis of the Allowance for Doubtful Accounts reveals:
Balance, 01/01/01
2001 Transactions --Provision for bad debts
Recovery of bad debts
Accounts written off as uncollectible
Balance, 12/31/01
$12,546
2,788
592
(976)
$14,950
4. Goodwill of $20,909 arose on purchase of another business on 01/01/01. Amortization for financial
purposes is over the maximum allowable period (40 years) and is included in Miscellaneous Expenses.
5. Assume that deductions for tax depreciation (i.e., Modified Accelerated Cost Recovery) for the year total
$113,854. Of this amount, $5,528 related to current year equipment purchases. All fixed asset additions
are 7-year assets.
6. Meals and entertainment costs of $1,394 included in Miscellaneous Expenses are subject to the 50%
disallowance rule.
7. Contributions included:
World Wildlife Fund
Government of Somalia
Methodist Teen Center
Total
$26,902
3,067
1,394
$31,363
All contributions were paid in cash during the year except for the Methodist Teen Center contribution,
which was pledged by the corporation (i.e., approved by the Board of Directors) on December 15, 2001
and paid on May 1, 2002.
8. Included in interest income is $1,150 from $26,400 of Omaha, Nebraska General Obligation Bonds held
throughout the current year. These bonds are included in the marketable securities account.
9. On 6/15/01, the corporation sold 100 shares of HeadGear Corp. common stock for $7,666. The stock had
been purchased on 8/14/96 for $9,897.
REQUIRED --From the above information, prepare Dimensions, Inc.’s 2001 Federal income tax return (Form 1120),
including all needed supporting statements, schedules, and forms. Unless otherwise noted, assume
Dimensions, Inc. follows the policies of making all elections to minimize its current income taxes and, to the
extent possible, of conforming procedures for financial and tax accounting. Round amounts to the nearest
dollar. If additional information is needed, make realistic assumptions and fill in all required data. Or, come
see me.