Accounting

December 31, 2018:

Sales $950,000

Minus: Cost of goods sold (450,000)

Gross profit $500,000

Plus: Dividends received on Invest Corporation stock $ 3,000

Gain on sale of Invest Corporation stock 30,000

Total dividends and gain 33,000

Minus: Depreciation ($7,500 + $52,000) $ 59,500

Bad debt expense 22,000

Other operating expenses 105,500

Loss on sale of Equipment 1 70,000

Total expenses and loss (257,000)

Net income per books before taxes $276,000

Minus: Federal income tax expense (90,000)

Net income per books $186,000

Information on equipment depreciation and sale:

Equipment 1:

• Acquired March 3, 2016 for $180,000

• For books: 12-year life; straight-line depreciation

• Sold February 17, 2018 for $80,000

Sales price $ 80,000

Cost $180,000

Minus: Depreciation for 2016 (½ year) $ 7,500

Depreciation for 2017 ($180,000/12) 15,000

Depreciation for 2018 (½ year) 7,500

Total book depreciation (30,000)

Book value at time of sale (150,000)

Book loss on sale of Equipment 1 $(70,000)

• For tax: Seven-year MACRS property for which the corporation made no Sec. 179

election in the acquisition year and elected out of bonus depreciation.

Equipment 2:

• Acquired February 16, 2017 for $624,000

• For books: 12-year life; straight-line depreciation

• Book depreciation in 2018: $624,000/12 = $52,000

• For tax: Seven-year MACRS property for which the corporation made the Sec. 179

election in 2017 but elected out of bonus depreciation.

Other information:

• Under the direct writeoff method, Jackson deducts $15,000 of bad debts for tax purposes.

• Jackson has a $40,000 NOL carryover and a $6,000 capital loss carryover from last year.

• Jackson purchased the Invest Corporation stock (less than 20% owned) on June 21,

2016, for $25,000 and sold the stock on December 21, 2018, for $55,000.

Required:

a. For 2018, calculate Jackson’s tax depreciation deduction for Equipment 1 and

Equipment 2, and determine the tax loss on the sale of Equipment 1.

b. For 2018, calculate Jackson’s taxable income and tax liability.

c. Prepare a schedule reconciling net income per books to taxable income before special

deductions (Form 1120, line 28).

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