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Tax Return Problem
Your client, Back the Pack (“BTP”) has hired you and your firm to 1) prepare its 2018 US federal tax return and 2) provide the appropriate accounting entries to record current and deferred taxes for its 2018 activities.
BTP is a t-shirt screen printing company andoperates as a regular Corporation under Subchapter C of the Internal Revenue Code.  BTPwas incorporated on April 1, 2017 and business began on June 1, 2017.  The tax year for the Corporation is the calendar year and it is on the accrual method.  The tax identification number for Back the Pack is 12345678.
Do not worry about including any non-numerical information that is not provided with the assignment.
Due date: Wednesday, April 17th.Please email your completed tax return (and supporting schedules, where applicable) to me by the end of that day (email addresses included in the syllabus). No late assignments will be accepted. Probably the easiest thing to do is scan the tax return into a pdf file.
Please MAKE SURE your name is on ALL pages of the solution. You will lose points if your name is not on each page of your solution.
Classroom Section (002): You may work in your tax research paper group if you wish, but do not collaborate with anyone else on the assignment. Online Section (601): You may work with one other classmate.If you work with a classmate or group, please turn in one solution with all of your names on it.In this case, please MAKE SURE you have all your names on ALL pages of the solution.One person will upload the solution in Moodle.
Tax return information
You need to complete Page 1 of the 2018 Form 1120 – U.S. Corporation Income Tax Return.  The Form 1120 page 1 is the tax income statement that includes all tax amounts for income and deductions.  You will only need to complete through line 30.
You will also need to complete the 2018 Form 4562 – Depreciation and Amortization. You do not need to complete Parts I and V of the form because BTP is not electing the Section 179 deduction and has no listed property for the 2018 tax year.  You will need to compute special depreciation in Part II (if applicable) and MACRS depreciation in Part III. Pay close attention to the dates and types of property placed into service.The total of these will go on Line 22 in Part IV (you may ignore Lines 21 and 23).Note that the depreciation amounts computed on Forms4562 flow to Form 1120 page 1.
Finally, you must complete Schedule M-1 Reconciliation of Income (Loss) per Books with Income per Return. This is the itemized book-tax differences (“BTD”). Put each BTD separately in the correct section.Schedule M-1 starts with net income per books and adjusts the book revenues and expenses to tax amounts using book-tax differences.  Line 28 of the Form 1120 should tie to line 8 on the Modified Schedule M-1.
All of these forms are found on the IRS website (www.irs.gov).
BTP owns the following assets:
Land purchased on 5/1/2017 for $180,000.  The land was placed in service on 6/1/2017.
Building purchased on 5/1/2017 for $350,000.  The building was placed in service on 6/1/2017.
Screen printing machinery purchased and placed in service on 6/1/2017 for $85,000.
Additional screen printing machinery purchased and placed in service on 2/1/2018 for $45,000.
Office furniture and fixtures purchased and placed in service on6/1/2017 for $90,000.
Computer equipment purchased and placed in service on 6/1/2017 for $35,000
Additional computer equipment purchase and placed in service on 3/1/2018 for $10,000
Warehouse purchased and placed in service on 9/1/2017 for $300,000
For book purposes, BTP uses straight-line depreciation and the same years of useful life that the IRS has determined for each category of asset.
In addition to depreciation expense, BTP had the following book income and expenses in 2018:
Income from t-shirt sales of $1,150,000.  Related cost of goods sold of $200,000
Municipal bond interest income of $1,200
Salaries and wages of $250,000
Accrued employee bonuses of $25,000 at 12/31/2018 (in addition to the salaries and wages) that were paid on 3/15/2019
A fine paid to the City of Raleigh of $1,500
Advertising costs of $7,000
Meals expense of $14,000
Entertainment expenses of $5,000
Potential legal liability expense in the amount of $7,500 accrued at 12/31/2018. The lawsuit has not been settled yet and the outcome is uncertain as of 12/31/2018.
Increases in the Allowance for Bad Debts account equaled $13,000 and specific account write-offs totaled $15,000
Expenses for supplies in the amount of $2,500 were accrued at 12/31/2018. However, these supplies were not delivered and paid for until January 20, 2019. BTP has not elected the recurring item exception for such supplies.
Back the Pack received payments for design services in 2017 and 2018 as follows:
$6,000 in 2017.  Two-quarters of the consulting services related to this payment were performed in 2017, one-quarter were performed in 2018, and the remainder will be performed in 2019.
$10,000 in 2018.  One-fifth of the consulting services related to this payment were performed in 2018.  The remaining services will be performed in 2019.
For income tax purposes, Back the Pack has elected to follow Rev Proc 2004-34 for prepaid services.
Tax Accounting
Prepare the journal entries for BTP to record:
Current tax expense for 2018
Deferred tax expense for 2018
Income taxes payable at 12/31/2018
Net deferred tax asset or liability at 12/31/2018

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