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7. From the following data, prepare an Income Tax Return for the year 1924 showing computation of tax, a schedule to show Cost of Manufacturing, and Balance Sheets as at beginning and end of taxable period.
(Note. It will be preferable to use an official income tax form in preparing this return. However, if this form cannot readily be obtained, the return may be prepared in statement form.)
The United Manufacturing Company is engaged in the manufacture of paper containers. It was incorporated on January 1, 1919, under the laws of your State. It is not affiliated with any other corporation.
The following list of accounts were taken from the Trial Balance at end of year.
The income from interest is made up of the following items:
Interest on Bank Deposits and Notes..
$3,486.18 233.75 $3,719.93
The profit of $4,400.00 from sale of property is the result of the following transaction: (1) public utility bonds which were acquired in 1920 at a cost of $55,000.00, were sold during the year 1924 for $60,500.00 in cash; (2) a tract of unimproved real estate, which was acquired in 1910 at a cost of $4,400.00 and which had a value on March 1, 1913, of $5,500.00, was sold in 1924 for $3,300.00.
The dividends in the amount of $2,552.00 were received on the stock of the National Manufacturing Company, a domestic corporation.
The bad debt recovered, $3,300.00, represents an account which had been written off and deducted from income in 1920.
The proceeds of life insurance in the amount of $11,000.00 was received by the corporation under a policy which had been carried on the life of the former president.
Repairs and replacements consist of the following:
Taxes paid during the year consist of the following:
Previous experience of the corporation has shown that the amount of bad debts sustained each year is approximately 10% of the accounts receivable outstanding at the close of the preceding year. Bad debts charged off during 1924 amounted to $5,810.91, which exactly equalled the reserve set up on December 31, 1923. Therefore, there was no balance remaining in the reserve for bad debts on December 31, 1924. Consequently, the corporation added to its reserve for bad debts as of December 31, 1924, 10% of its accounts receivable, or $7,677.28.
(Continued on page 139)
The depreciation reserve of the corporation on December 31, 1923, was $64,274.40, distributed among the assets as follows:
The amount of $11,755.04 was added to the depreciation reserve for the year 1924, based upon the following:
2% on building erected in 1919 at a cost of $108,322.50....... $ 2,166.45 1% on a building erected on July 1, 1924 at a cost of $41,800.00. 10% on machinery acquired in 1919, at a cost of $55,617.10.. 22% on machinery acquired on July 1, 1924, at a cost of $13,200.00...
10% on furniture and fixtures acquired in 1919, at a cost of $5,757.40...
20% on delivery equipment acquired in 1922 at a cost of $13,515.70...
The following is an itemized statement of the inventories shown in the Balance Sheet:
A cash dividend of $19,800.00 was paid on April 1, 1924, and another cash dividend of $27,500.00 on December 1, 1924. 8. You are requested by the president of the November Corporation to assist in the preparation of the company's Federal Income Tax Return for the current calendar year.
You are informed that the company was organized on January 1, 1910, with an authorized and issued capital of $4,150,000, divided as to:
You are further informed that of this capital $1,000,000 common stock was sold to an underwriting syndicate for cash at par, less 6% commission, and that the remainder of the stock was issued to the vendor company in acquisition of the business, property, good will and other assets taken over. The capital stock outstanding has been unchanged from the date of organization to January 1, current year, except as to the redemption of the preferred stock indicated, which took place March 31, three years ago. The book values of the fixed properties are based on an appraisal made by an appraisal company as at March 1, 1913. In addition to the common stock dividend paid during the current year, the company issued a further $1,000,000 common stock, which was sold for cash at par as follows:
On October 31, current year, it also redeemed for cash and retired preferred stock at par to the amount of $375,000.
(Note. The Reserve for Loss on Bad Debts shows a credit balance of $250,000 at December 31 as compared with a balance of $100,000 for the beginning of the fical period. This represents an increase in the Reserve account of $150,000. However, the Statement of Profit and Loss shows losses amounting to $200,000. It is apparent, therefore, that the addition to the Reserve account must have been $200,000 and that during the year actual losses charged to the Reserve amounted to $50,000. The amount of the addition to the Reserve may be claimed as a deduction in solving this problem.)