Corporate Income Tax Return (Form 1120) Tx 8120 Project

1 Corporate Income Tax Return ( form 1120) Tx 8120 ProjectFor two years, you have worked for a CPA firm, Weil, Duit, Wright, & Company (EIN 33-1201885), located at 1840 Peachtree Street, Atlanta, GA 30314 (telephone 404-389-7724). The firmassigned you primary responsibility to prepare the 2005 Income tax Return and schedules forSharpe Supplies Corporation. You can obtain an electronic copy of form 1120 and relatedinstructions from This Project does not require the completion of form 4562, Form4684, form 4797, or form 6251 (but you may do so if you wish). Instead of completing theseforms, simply report the summary figures on the appropriate lines of form 1120.

2 However, pleasecompose and provide any schedule when the detail is available and form 1120 requests it. Evenwhen not required, provide a supporting schedule for items on the Return if such a schedule wouldfacilitate the Return s review. At a minimum, you should provide supporting schedules for interestincome, taxes and licenses, and other deductions on page 1 of form 1120; current assets, otherinvestments, buildings and other depreciable assets, other assets, and other current liabilities inSchedule L; and other decreases of unappropriated retained earnings in Schedule Sharpe Supplies Corporation (located at 3114 West Hamilton Road, Nashville, TN37233) uses the accrual method and the calendar year.

3 It manufactures office supplies (businessactivity code 3998). Its employer identification number is 35-0817903, and it was incorporated onJuly 1, the taxable year, Sharpe Supplies neither owned 20 percent or more of anothercorporation s voting stock or stock value, nor did any person own 20 percent or more of its votingstock or stock value. Sharpe Supplies is neither a personal holding company nor a member of acontrolled group of corporations. Also, Sharpe Supplies owns no interest in foreign banks,securities, or financial accounts, nor has it had any dealings with foreign trusts. Further, allmanufacturing and sales occur within the United States, and Sharpe can deduct $5,914 for itsdomestic production corporation has a $100 capital loss carryover from the prior year.

4 Sharpe Supplies filed allrequired information returns related to the dividends it paid this year ( , form 1099-DIV).General Approach to Completing form 1120 Start with page 1 of form 1120, completing Schedules A, C, E, and J as needed. Taxableincome before special deductions (line 28 in 2005) carries over to Schedule M-1 as the amount withwhich the preparer must reconcile net page 1 of form 1120 shows an overpayment of federal Income tax (line 35 in 2005), thenecessary adjusting entry: Increases prepaid federal Income tax (current asset) on Schedule L, Increases net Income (via decrease in federal Income tax expense) on Schedules M-1 andM-2, and Decreases federal Income tax on Schedule effect on Schedule M-1 washes out.

5 But, the increase in net Income on Schedule M-2 increasesunappropriated retained earnings, which carries over to Schedule L and causes the balance sheet to balance. If page 1 of form 1120 shows an underpayment of federal Income tax (line 34 in 2005), thenecessary adjusting entry: Increases accrued federal Income tax (current liability) on Schedule L,2 Decreases net Income (via increase in federal Income tax expense) on Schedules M-1 andM-2, and Increases federal Income tax on Schedule effect on Schedule M-1 washes out. But, the decrease in net Income on Schedule M-2decreases unappropriated retained earnings, which carries over to Schedule L and causes thebalance sheet to balance.

6 3 Balance Sheet (December 31, 2004)AssetsCash$ 118,515 Notes and accounts receivable 63,115 Inventories 355,240 Investments in government obligations 30,000 Tax-exempt securities 10,000 Other investments 96,700 Buildings and other fixed depreciable assets$627,096 Less accumulated depreciation 251,146375,950 Land 17,500 Other assets 61,225 Total assets $1,128,245 Liabilities and CapitalAccounts payable $ 39,456 Mortgages, notes, and bonds payable due inless than one year 40,000 Other current liabilities 71,410 Mortgages, notes, and bonds payable due inone year or more 225,000 Capital stock.

7 PreferredCommon$ 50,000 435, 000485,000 Paid-in or capital surplus 20,000 Retained earnings Appropriated 54,544 Retained earnings Unappropriated 195,379 Less cost of treasury stock (2,544) Total liabilities and capital$1,128,2454 Pre-Closing Trial Balance per Books (December 31, 2005)AccountsDebitCreditCash$ 126,342 Accounts receivable 61,159 Trade receivable 11,100 Inventories (closing)a 333,894 Corporate bondsb 22,400 State and municipal bonds 30,000 Treasury bonds 48,000 Stock in domestic corporations105,500 Land 25,500 Buildings 456,500 Machinery and equipment 149,892 Office furniture 21,440 Trucks 45,264 Sinking fund for bond retirementc 50,000 Goodwill 1 Cash surrender value of insurance onofficers lives 8,150 Prepaid insurance expensesd 2,215 Unamortized bond premium 1,265 Unamortized bond issue expense 8,8755 Accounts payable36,075 Notes payable (short-term)

8 30,000 Accrued interest on notes payable 2,925 Accrued payroll 3,328 Accrued vacation pay 18,910 Accrued taxes:Capital stock (state)Franchise (state) Income (state) Income (federal)eProperty (state)Employment 520 393 135 8,000 1,048 Withheld payroll taxes3,062 Bonds payable (long-term)225,000 Accumulated depreciation311,500 Capital stock:7% PreferredCommon50,000435,000 Paid-in surplus20,000 Unappropriated retained earnings182,379 Treasury stock2,544 Appropriated retained earningsf67,544 Sales1,306,023 Sales returns and allowances6,395 Net purchases422,133 Inventory variations (decrease)

9 G21,346 Factory wages149,613 Costs attributable to inventoryh166,1716 Insurance8,795 Depreciationi8,704 Advertising19,901 Bad debts3,923 Insurance premiums on officers livesj2,573 Office salariesk32,392 Sales force compensation91,703 Officers compensationl76,000 Pensions10,000 Heating and lightingm9,720 Service guarantees8,285 Printing and mailing5,257 Amortized bond issue expense700 Interest expense22,000 Legal and accounting fees12,500 Travel expensesn6,850 Health plan costs20,700 Taxes:Capital stock (state)Franchise (state)Property (state)EmploymentIncome (state) Income (federal)o5203938,00025,4914,32058,0007 Interest Income : Corporate bondspState and municipal bondsTreasury bondsCertificates of depositTrade accounts1,5687887,1252,300770 Dividends received (domestic)q8,970 Amortized bond premiumr142 Rental income15,000 Sales of scraps411 Net securities salest1,758 Real estate and equipment salesu7,288 Worthless stockv2,500 Fire lossw1,002 Contributionsx2,250 Cash dividends paid on.

10 PreferredCommon3,500 26,000 Totals$2,747,678$2,747,6788 Notes for Trial Balance a The company measures inventory at cost and uses Show Corporate bonds and shares held in domestic and foreign corporations as otherinvestments on Schedule L. Remember to attach the required List sinking funds, goodwill, cash surrender value of insurance on officers lives,unamortized bond premium, and unamortized bond issue expense as other assets on ScheduleL. Remember to attach the required Prepaid insurance expenses appear as other current assets on Schedule L. If estimatedprepayments of federal Income tax exceed the actual federal Income tax liability appearing on page1 of form 1120, the overpayment also appears as other current assets.