Class Exercise: Complete the 2013 Tax Services for Blue Catering Service, Inc

Hints:

•Complete Blue Catering Service Inc.'s (BCS)2013Form 1120, Schedule D, and Schedule G (if applicable), Form 1125-A and Form 1125-E using the information provided below.•Form 4562 for depreciation isnot required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120.•Assume that BCSdoes not owe any alternative minimum tax.•If any information is missing, use reasonable assumptions to fill in the gaps.•The forms, schedules, and instructions can be found at the IRS Web site (www.irs.gov). The instructions can be helpful in completing the forms.

Facts:

Cara Siler, Janna Funk, and ValerieCloward each ownone-third of the common stock of Blue Catering Services Inc. (BCS).BCS was incorporated on February 4, 2008. It has only one class of stock outstanding and operates as a C corporation for tax purposes.BCS caters all types of social events throughout southern California.

•BCS is located at 540 Waverly Way, San Diego, CA 92101.•BCS's Employer Identification Number is 38-4743474.•BCS's business activity is catering food and services.Its business activity code is 722300.•The shareholders also work as officers for the corporation as follows:oCaraSileris the chief executive officer and president (Social Security number 231-54-8976).oJanna Funk is the executive vice president and chief operating officer (Social Security number798-56-3241).oValerieClowardis the vice president of finance (Social Security number 879-21-4536).•All officers devote 100 percent of their time to the business and all officers are U.S. citizens.•BCS uses theAccrual Method of accounting and has acalendar year-end.•BCS made four equal estimated tax payments of $20,000 each.Its tax liability last year was $70,000.If it has overpaid its federal tax liability, BCS would like to receive a refund.•BCS paid a dividend of $30,000 to its shareholders on November 1,2013.BCS had ample earnings and profits (E&P) to absorb the distribution.



The following is BCS's auditedIncome Statement for2013:

BlueCateringService, Inc.
Income Statement
For year ending December 31,2013
Revenue from sales	$1,800,000
Sales returns and allowances	(5,000)
Cost of goods sold	(350,000)
Gross profit from operations	$1,445,000
Other income:	Â
Capital loss	(15,000)
Dividend income	25,000
Interest income	10,000
Gross income	$1,465,000
Expenses:	Â
Compensation	(950,000)
Depreciation	(10,000)
Bad debt expense	(15,000)
Meals and entertainment	(3,000)
Maintenance	(6,000)
Property taxes	(11,000)
State income taxes	(45,000)
Other taxes	(44,000)
Rent	(60,000)
Interest	(5,000)
Advertising	(52,000)
Professional services	(16,000)
Employee benefits	(32,000)
Supplies	(5,000)
Other expenses	(27,000)
Total expenses	(1,281,000)
Income before taxes	184,000
Federal income tax expense	(62,000)
Net income after taxes	$ 122,000



The following are BCS's auditedBalance Sheetas of January 1,2013, and December 31,2013.

Â	2013
Â	BlueCateringService, Inc Balance Sheet
Â	January 1 through	December 31
Assets	As of 12/31/12	As of 12/31/13
Cash	$ 180,000	$ 205,000
Accounts receivable	560,000	580,000
Allowance for doubtful accounts	(60,000)	(50,000)
Inventory	140,000	150,000
U.S. government bonds	20,000	20,000
State and local bonds	120,000	120,000
Investments in stock	400,000	360,000
Fixed assets	140,000	160,000
Accumulated depreciation	(50,000)	(60,000)
Other assets	20,000	21,000
Total assets	$1,470,000	$1,506,000
Liabilities and Shareholders' Equity	Â	Â
Accounts payable	280,000	240,000
Other current liabilities	20,000	18,000
Other liabilities	40,000	26,000
Capital stock	400,000	400,000
Retained earnings	730,000	822,000
Total liabilities and shareholders' equity	$1,470,000	$1,506,000



Notes:

1.BCS's inventory-related purchases during2013 were $360,000. It values its inventory based on cost using the FIFO inventory cost flow method.Assume the rules of §263A do not apply to BCS.2.Of the $10,000 interest income, $1,250 was from a City of Irvine bond that was used to fund public activities (issued in 2005), $1,750 was from an Oceanside city bond used to fund private activities (issued in 2004), $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.3.BCS's dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000 shares of the stock in Clever Cakes at the beginning of the year. This represented25 percent ofCC outstanding stock.4.On October 1,2013, BCS sold 1,000 shares of its CC stock for $25,000. It had originally purchased these shares on April 18, 2008, for $40,000.After the sale, BCS owned25 percent of CC.5.BCS's compensation is as follows:oCara $150,000oJanna $140,000oValerie $130,000oOther $530,0002.BCS wrote off $25,000 in accounts receivable as uncollectible during the year.3.BCS's regular tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.4.The $5,000 interest expense was from a business loan.5.Other expenses include $6,000 for premiums paid on term life insurance policies for which BCS is the beneficiary. The policies cover the lives of Cara, Janna, and Valerie.

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