Aurora Furniture Sales, Inc. is located at 2713 Long Drive, Peoria, AZ 85345. The
Corporation uses the calendar year and accrual basis for both book and tax purposes. It is engaged in the sale of office furniture with an employer identification number (EIN)
of 95-3281545. The company incorporated on December 31, 2004, and began business on January 2, 2005. Table 3-1 contains balance sheet information at January 1, 2008, and December 31, 2008. Table 3-2 presents an income statement for 2008. These schedules are presented on a book basis. Other information follows.
Estimated Tax Payments (Form 2220):
The corporation deposited estimated tax payments as follows:
April 15, 2008 $105,000
June 16, 2008 (June 15 fell on a Sunday) 216,000
September 15, 2008 253,000
December 15, 2008 253,000
Total $827,000
Taxable income in 2007 was $1,700,000, and the 2007 tax was $578,000. The corporation
earned its 2008 taxable income evenly throughout the year. Therefore, it does not use
the annualization or seasonal methods.
Inventory and Cost of Goods Sold (Schedule A):
The corporation uses the periodic inventory method and prices its inventory using the
lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases
should be reflected in Schedule A. No other costs or expenses are allocated to cost of
goods sold. Note: the corporation is exempt from the uniform capitalization (UNICAP)
rules because average gross income for the previous three years was less than $10 million.
TABLE 3-1
Aurora Furniture Sales, Inc.—Book Balance Sheet Information
January 1, 2008 December 31, 2008
Account Debit Credit Debit Credit
Cash $ 67,244 $ 99,845
Accounts receivable 427,248 496,800
Allowance for doubtful accounts $ 36,316 $ 42,228
Inventory 2,300,000 3,220,000
Investment in corporate stock 180,000 65,000
Investment in municipal bonds 30,000 30,000
Cash surrender value of insurance policy 20,000 34,000
Buildings 1,800,000 1,800,000
Accumulated depreciation—Buildings 90,000 126,000
Equipment 1,050,000 1,580,000
Accumulated depreciation—Equipment 175,000 207,333
Trucks 240,000 240,000
Accumulated depreciation—Trucks 72,000 120,000
Land 500,000 500,000
Deferred tax asset 15,305 14,732
Accounts payable 1,000,000 600,000
Notes payable (short-term) 500,000 400,000
Accrued payroll taxes 13,800 17,250
Accrued state income taxes 7,500 12,200
Accrued federal income taxes 112,449
Bonds payable (long-term) 1,800,000 1,400,000
Deferred tax liability 175,181 312,560
Capital stock—Common 920,000 920,000
Retain earnings—Unappropriated 1,840,000 3,810,357
Totals $6,629,797 $6,629,797 $8,080,377 $8,080,377
Line 9 (a) Check (ii)
(b), (c) & (d) Not applicable
(e) & (f) No
Compensation of Officers (Schedule E):
(a) (b) (c) (d) (f)
John Hettinger 456-73-6181 100% 50% $270,000
Jennifer Herzog 672-86-8094 100% 25% 164,000
Richard Dotson 354-23-1134 100% 25% 164,000
Total $598,000
Bad Debts:
For tax purposes, the corporation uses the direct writeoff method of deducting bad debts.
For book purposes, the corporation uses an allowance for doubtful accounts. During 2008,
the corporation charged $36,800 to the allowance account, such amount representing actual
writeoffs for 2008.
Additional Information (Schedule K):
1 b Accrual 6-7 No
2 a 451140 8 Do not check box
b Retail sales 9 Fill in the correct amount
c Furniture 10 3
3-4a No 11 Do not check box
4b Yes 12 Not applicable
5 No 13 No
TABLE 3-2
Aurora Furniture Sales, Inc.—Book Income Statement 2008
Sales $ 9,200,000
Returns (230,000)
Net sales $ 8,970,000
Beginning inventory $2,300,000
Purchases 5,060,000
Ending inventory (3,220,000)
Cost of goods sold (4,140,000)
Gross profit $ 4,830,000
Expenses:
Amortization $ –0–
Depreciation 186,333
Repairs 19,136
General insurance 50,600
Net premium-Officers’ life insurance 41,400
Officer’s compensation 598,000
Other salaries 368,000
Utilities 66,240
Advertising 44,160
Legal and accounting fees 46,000
Charitable contributions 27,600
Payroll tax 57,500
Interest expense 193,200
Bad debt expense 42,712
Total expenses (1,740,881)
Gain on sale of equipment 120,000
Interest on municipal bonds 4,600
Dividend income 11,040
Net loss on stock sales (16,000)
Net income before income taxes $ 3,208,759
Federal income tax expense (1,077,402)
State income tax expense (69,000)
Net income $ 2,062,357
Organizational Expenditures:
The corporation incurred $6,500 of organizational expenditures on January 2, 2005.
For book purposes, the corporation expensed the entire expenditure pursuant to Statement of Position 98-5.
For tax purposes, the corporation elected under Sec. 248 to deduct $5,000
in 2005 and amortize the remaining $1,500 amount over 180 months, with a full month’s
amortization taken for January 2005. The corporation reports this amortization in Part
VI of Form 4562 and includes it in “Other Deductions” on Form 1120, Line 26.
Capital Gains and Losses:
The corporation sold 100 shares of PDQ Corp. common stock on March 7, 2008, for
$55,000. The corporation acquired the stock on December 15, 2007, for $65,000.
The corporation also sold 75 shares of JSB Corp. common stock on September 17, 2008, for $44,000. The corporation acquired this stock on September 18, 2005, for $50,000. The
corporation has a $7,500 capital loss carryover from 2007.
Fixed Assets and Depreciation:
For book purposes: The corporation uses straight-line depreciation over the useful lives of
assets as follows: Store building, 50 years; Equipment, 15 years (old) and ten years (new);
and Trucks, five years. The corporation takes a half-year’s depreciation in the year of
acquisition and the year of disposition and assumes no salvage value. The book financial
statements in Tables 3-1 and 3-2 reflect these calculations.
For tax purposes: All assets are MACRS property as follows: Store building, 39-year nonresidential real property; Equipment, seven-year property; and Trucks, five-year property.
The corporation acquired the store building for $1.8 million and placed it in service on
January 2, 2005. The corporation acquired two pieces of equipment for $350,000
(Equipment 1) and $700,000 (Equipment 2) and placed them in service on January 2,
2005. The corporation acquired the trucks for $240,000 and placed them in service on
July 18, 2006. The corporation did not make the expensing election under Sec. 179 on
any property acquired before 2008. Accumulated tax depreciation through December 31, 2007, on these properties is as follows:
Store building $136,602
Equipment 1 196,945
Equipment 2 393,890
Trucks 124,880
On November 16, 2008, the corporation sold for $400,000 Equipment 1 that originally
cost $350,000 on January 2, 2005. The corporation had no Sec. 1231 losses from
prior years. In a separate transaction on November 17, 2008, the corporation acquired
and placed in service a piece of equipment costing $880,000. These two transactions do
not qualify as a like-kind exchange under Reg. Sec. 1.1031(k)-1(a). The new equipment is
seven-year property. The corporation made the Sec. 179 expensing election with regard to the new equipment and claimed bonus depreciation. Where applicable, use published IRS depreciation tables to compute 2008 depreciation (reproduced in Appendix C of this text).
Other Information:
• The corporation’s activities do not qualify for the U.S. production activities deduction.
• Ignore the AMT and accumulated earnings tax.
• The corporation received dividends (see Income Statement in Table C:3-4) from taxable, domestic corporations, the stock of which Aurora Furniture Sales, Inc. owns less
than 20%.
• The corporation paid $92,000 in cash dividends to its shareholders during the year
and charged the payment directly to retained earnings.
• The state income tax in Table C:3-2 is the exact amount of such taxes incurred during
the year.
• The corporation is not entitled any credits.
Required: Prepare the 2008 corporate tax return for Aurora Furniture Sales, Inc. along
1with any necessary supporting schedules.
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