Form 1120 Tax Return Preparation

This practical assignment requires the preparation of Form 1120, the U.S. Corporate Income Tax Return, for Southwest Distributing Co. using the provided financial data for 2015. The assignment includes various financial details such as income, expenses, assets, liabilities, and equity. Students are expected to calculate taxable income, apply relevant tax laws, and complete all necessary schedules and forms. The solution involves analyzing the company's financial statements, understanding tax implications of different transactions, and accurately filling out the required tax forms. The assignment also includes specific details about depreciation, amortization, and other tax-related items that need to be considered for accurate tax return preparation.

1120 Problem
Ben Higgins (SSN: 315-78-5542) is the sole shareholder of Southwest Distributing Co., Inc. Southwest
Distributing sells traps and other items designed to lure and catch wild birds in the southwest. As the
CEO (employee) of SWDC, Mr. Higgins receives a salary of $100,000. He also has 2 other employees.
Southwest Distributing Co’s financial information for 2015 and selected from 2014 is as follows:
2014 2015
Cash 40,000
45,00
0
Inventory 30,000
25,00
0
Accounts receivable 120,000
128,71
0
Allowance for doubtful accounts (12,000)
(11,000
)
Tax refund receivable 0 6,290
Investment in stock 50,000 50,000
Tax exempt bonds 100,000
100,00
0
U.S. government bonds 100,000
100,00
0
Equipment and buildings 300,000
315,00
0
Accumulated depreciation (65,000)
(95,000
)
Land 50,000
50,00
0
Patent 75,000
75,00
0
Accumulated amortization (75,000)
(75,000
)
Total assets 713,000
714,00
0
Accounts payable 150,000
111,48
7
Accrued expenses 35,000
28,00
0
Notes payable in 2017 100,000
100,00
0
Capital stock 10,000
10,00
0
Additional paid in capital 90,000
90,00
0
Retained earnings 328,000
374,51
3
Total liabilities & stockholder's equity 713,000
714,00
0

2015
Sales $2,050,000
Returns and allowances (100,000)
Cost of goods sold (1,150,000)
Net gains (losses) 13,000
Interest income 15,000
Dividend income 6,250
Total income 834,250
Expenses
Salaries 200,000
Repairs 25,000
Bad debts 15,000
Rent 40,000
State and local taxes 5,000
Payroll taxes 17,000
Interest expense 10,000
Charitable contributions 45,000
Depreciation 30,000
Advertising 8,000
Profit sharing plan 20,000
Travel 20,000
Meals and entertainment 5,000
Insurance 10,000
Supplies 5,000
Total Expenses 455,000
Income before federal income tax
379,25
0
Federal income tax 130,914
Net income $ 248,336

Other information:
Activity in the allowance for doubtful accounts for 2015 was:
Beginning balance 12,000
Charge offs (16,000)
Bad debt expense 15,000
Ending balance 11,000
Interest income includes $10,000 from U.S. Government bonds and $5,000 from Texas State bonds.
The dividends were from Sunset Designs, Inc. Southwest Distributing owns 5% of Sunset’s stock.
Depreciation listed above is for book purposes. For tax purposes, Southwest Distributing elects Section
179 for any eligible assets purchased during the year. In 2015, the company purchased and placed in
service used equipment (7 year property) on June 1 costing 15,000. MACRS depreciation for assets
placed in service prior to 2015 totaled $5,000.
The patent was purchased 10 years ago. At the time of purchase, Ben thought it would have an economic
useful life of 5 years and amortized it for book purposes over that length of time. Its remaining legal life
was 17 years, and Southwest Distributing still has the rights to the patent.
Interest expense includes $7,000 for an operating loan and $3,000 for a loan to purchase the Arizona state
bonds.
Southwest distributed $200,000 in dividends to Ben during 2015.
For those really studying more than they need: Southwest has a plan to build a new warehouse costing
$220,000. Southwest qualifies for the small business exemption from alternative minimum tax.
Hint: Southwest does not record deferred taxes.
Southwest is located at 28 Love Highway, Austin, TX, 12546. Its employer identification number is 12-
345678. The corporation was formed on 7/5/2000. They are on the accrual basis of accounting with a
December 31 year end. Timely quarterly federal estimated tax payments of $34,000 each were made for
2015.
Prepare all required forms and schedules. Note: read the 1120 line instructions as you are completing the
form 1120. If there is a line we have not studied at all, that should be ignored. The instructions lead you
to all other required forms. Submit the completed return and schedules via a single PDF as per
instructions. Do not submit form instructions.