Analyzing a Corporate Tax Return
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Week 5 Assignment – Analyzing a Corporate Tax Return
Overview
You are a senior tax accountant in the firm, Ernest & Rainhouse. Joe, a new junior accountant, has just prepared his first corporate tax return for Zeus, Inc. The electronic filing system has rejected the Zeus, Inc.’s Form 1120: U.S. Corporation Income Tax Return 2020 [PDF] due to errors and omissions. Joe is seeking your help in determining his mistakes and in answering some corporate tax questions he is unsure about. You are to read the scenario below and then follow the instructions.
Scenario
Zeus, Inc. is organized as a corporation and is taxed as a C corporation with a calendar year end. Zeus, Inc. owns and operates an amusement park in Los Angeles, California. Zeus, Inc.’s address, employer identification number (EIN), and date of incorporation are as follows:
Zeus, Inc.
77 Sunset Strip.
Los Angeles, CA 90028.
EIN: 56-1234567.
Date incorporated: July 1, 2010.
Zeus, Inc. is owned by 77 shareholders. No person or entity owns directly 20% or more, or owns, directly or indirectly, more than 50% of the voting stock of Zeus, Inc. No one is from outside of the United States.
Zeus, Inc. uses the accrual method of accounting. Zeus, Inc. is not audited by a CPA firm. It does, however, use GAAP-based financial statements and has never had a restatement of its income statement.
Zeus, Inc. reported the following information for 2020:
Zeus, Inc. made payments that required it to file federal form(s) 1099. The 1099s were filed timely.
Zeus, Inc. average annual gross receipts for the prior three years are under $26,000,000.
Zeus, Inc. elects to file a complete Schedule M-3 even if only M-1, or a partial M-3, is required.
Additional Information Used in the Preparation of Zeus, Inc. Financial Statements:
On August 1, 2020, Zeus, Inc. was notified by its legal counsel that Zeus, Inc. was being sued by a former employee regarding her termination of employment from Zeus, Inc. On December 21, 2020, a legal settlement was reached with this terminated employee. As part of the settlement, Zeus agreed to pay the employee a settlement amount of $190,000 on January 10, 2021. Zeus, Inc. accrued this expense on its 2020 financial statements.
Zeus, Inc. owns 12% of Fun Fair of Russia, a Russian corporation operating a theme park on the outskirts of Moscow. Fun Fair of Russia remitted dividends to Zeus, Inc. of $14,000. Zeus, Inc. also received $300 in dividends from holding marketable securities (all less than 20% owned by Zeus, Inc.).
From inception until this year, Zip Coaster has been Zeus’s main attraction, but it aged and lost appeal. Zeus, Inc. purchased a new attraction known as the Swirlwind. The Swirlwind was installed and placed in operation on March 1, 2020, at a cost of $6,000,000 to acquire and place into service.
Zeus, Inc. rents its amusement equipment from vendors. As of December 31, 2019, and December 31, 2020, respectively, Zeus, Inc. has prepaid vendors for equipment rental of $30,000 for January 2020 and $35,000 for January 2021.
On December 26, 2020, Zeus, Inc. prepaid a contractor $17,500 to repair three pieces of maintenance shop equipment. Zeus, Inc. fully expects that the contractor will have completed the project by January 31, 2020.
As of December 31, 2019, and 2020, respectively, Zeus, Inc. had vacation accruals on its books of $29,000 and $35,000.
On December 2, 2020, Zeus, Inc. held an advertising give-away of $100,000.
Zeus, Inc. rents part of their unused land. Zeus, Inc. received a check for $50,000 on December 27, 2020, for 6-months rental beginning January 1, 2021. The lease contains a clause that the rent is nonrefundable to the renter under any circumstances.
During the year, Zeus, Inc. made the following estimated tax payments:
Estimated Tax Payments
Date Federal Estimated Tax Payment California Estimated Tax Payment
4/15/2020 $72,500 $15,000
6/15/2020 $72,500 $15,000
9/15/2020 $72,500 $15,000
12/15/2020 $72,500 $15,000
On December 1, 2020, Zeus Inc. paid $400,000 dividends to all common stockholders.
Additional Information Used in the Preparation of Zeus, Inc. Corporate Tax Return:
Zeus, Inc. maintains a portfolio of tax-exempt securities and publicly traded stocks as a measure to provide immediate liquidity if needed. All of these securities originate from less than 20% owned domestic corporations. Zeus, Inc. paid an attorney $10,000 in obtaining the tax-exempt securities.
Zeus’s regular tax depreciation for the year is correctly calculated as $1,112,499 (from previous year’s purchases) before considering the 2020 addition of the Swirlwind. Because of the Swirlwind’s modular design, it is considered personal property. (Not real property.)
Near the end of the year, Zeus, Inc. switched its property and casualty insurance company. As a result, the plan year for its insurance contract was altered. On December 31, 2020, Zeus, Inc. prepaid insurance premiums of $25,000 representing coverage through February 15, 2021, as a condition of being accepted by the new company. Zeus, Inc. did not expense any of the prepayments for financial accounting purposes.
Zeus, Inc.’s officer information for the year is as follows: (Compensation amounts included in total wages on the income statement for all employees.)
Officer Information
Name Social Security # % of Time Devoted to Business % of Stock Owned Amount of Compensation
Margo Harrington 123-45-6789 100% .05% $235,000
Dean Williams 987-65-4321 100% .03% $195,000
Dennis Johns 456-78-9321 100% 0% $165,000
Jamie Conway 321-45-6978 100% 0% $150,000
All the accrued wages and bonus amounts on the financial statements as of December 31, 2019, were paid on February 28, 2020.
The winner of the advertising give-away of $100,000 was presented the check on January 15, 2021.
As of March 15, 2020, and 2021, respectively Zeus, Inc. had paid $5,000 and $8,000 of the vacation accrued amounts.
Zeus, Inc. Financial Statements:
Balance Sheet
Zeus, Inc. Balance Sheet As of Dec. 31, 2019 As of Dec. 31, 2020
Assets:
Cash 165,000 119,000
Accounts Receivable 128,000 75,000
Less: Allowance for Doubtful Accounts (43,000) (49,000)
Inventory 422,000 390,000
Tax-exempt Securities 150,000 150,000
Publicly Traded Stocks 200,000 200,000
Fixed Assets 24,000,000 28,000,000
Less: Accumulated Depreciation (13,542,000) (12,892,000)
Prepaid Insurance 25,000
Prepaid Rent 30,000 35,000
Prepaid Contractors 17,500
Other Assets 150,000 250,000
Total Assets 11,660,000 16,320,500
Liabilities & Stockholders’ Equity:
Accounts Payable 48,000 62,000
Accrued Wages 123,000 118,000
Accrued Bonuses 68,500 39,000
Accrued Vacation 29,000 35,000
Legal Settlement Accrual – 190,000
Prize Accrual – 100,000
Unearned Rental Revenue – 50,000
Notes Payable – Short Term 1,540,000 1,084,000
Notes Payable – Long Term 7,112,000 11,728,000
Capital Stock 100,000 100,000
Additional Paid-in Capital 2,000,000 2,000,000
Retained Earnings 639,500 814,500
Total Liabilities & Stockholders’ Equity 11,660,000 16,320,500
Income Statement
Zeus, Inc. Income Statement
For the Year Ended December 31, 2020
Income:
Sales 26,523,275
Less: Sales Returns & Allowances (113,500)
Net Sales 26,409,775
Cost of Goods Sold (2,052,500)
Gross Margin 24,357,275
Other Income:
Dividend Income 14,300
Interest Income 2,650
Municipal Bond Interest Income 2,300 19,250
Total Income: 24,376,525
Expenses:
Employee Salaries 13,905,600
Repairs & Maintenance 492,350
Bad Debts 58,000
Rent 1,543,000
Payroll Taxes 1,112,400
Licensing Fees 10,750
Property Taxes 277,000
Interest Expense 781,000
Depreciation 1,350,000
Office Supplies 33,950
Employee Training 53,750
Safety Expenses 31,000
Political Contribution 2,500
CA Safety Commission Fine 5,000
Advertising 290,500
Admission Supplies 143,250
Attorney Fees 10,000
Meals & Entertainment 8,500
Travel 13,550
Insurance 215,000
Legal Settlement 190,000
Prize Contest Expense 100,000
Fuel 158,675
Utilities 2,530,500
Telephone 135,250
Total Expenses Before Taxes 23,451,525
CA Income Tax Expense 60,000
Federal Tax Expense 290,000
Total Income Taxes 350,000
Net Income: 575,000
Instructions
Write 3-5 page paper in which you do the following:
Identify at least three errors or omissions on the Zeus, Inc.’s Form 1120: U.S. Corporation Income Tax Return 2020 [PDF], justifying selections with IRS codes, IRS regulations, court cases, or FASB statements.
Explain the criteria that requires the use of M-3 and describe how it is more beneficial to the financial statement user.
Explain at least two IRS approved methods available to Zeus Inc. to make estimated tax payments, explaining and justifying the preferred method.
Explain the relationship of a corporation’s tax year and their financial reporting year, explaining at least two complications. Provide how to mitigate the two complications that might arise in preparing Zeus Inc’s income tax provision for the financial statements.
Use at least two quality sources to support your writing. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment.
Writing contains accurate grammar, mechanics, and spelling in accordance with SWS style.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.
The specific course learning outcomes associated with this assignment:
Analyze a corporate tax return to collect the required information for the preparation of a corporate tax return.
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