Beginning Inventory: $210,000
Purchases: $840,000
Cost of Goods Available for Sale: $1,050,000
Estimated Cost of Goods Sold: $660,000 ($1,100,000 \times 0.60$)
Estimated Ending Inventory: $390,000
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Step 1: Calculate Total Cost per Item
Formula: Quantity × Unit Cost
Example (Item 110): $80 \text{ units} \times \$10.00 = \mathbf{\$800}$
Step 2: Calculate Total Net Realizable Value (NRV) per Item
Formula: Quantity × Unit NRV
Example (Item 110): $80 \text{ units} \times \$10.50 = \mathbf{\$840}$
Step 3: Apply the LCNRV Rule (Individual Item Basis)
For each line, we select the lower of the two totals calculated above.
Item 110: Lower of $\$800$ vs $\$840$ is $\$800$.
Item 120: Lower of $\$1,552.50$ vs $\$1,539.00$ is $\$1,539$.
Item 121: Lower of $\$2,070$ vs $\$2,115$ is $\$2,070$.
Step 4: Analyze Net Income Impact
Which method yields the highest net income? Evaluating inventory by group (Total) typically yields a higher value than evaluating item-by-item.
A higher ending inventory value results in a lower Cost of Goods Sold (COGS), which leads to higher Net Income.
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Retail Inventory Method: Step-by-Step
Retail Inventory Method: Step-by-Step
1. Calculate Cost of Goods Available for Sale (GAS):
Cost: $\$213,500$ (Beg. Inv) + $\$323,500$ (Purchases) + $\$3,150$ (Freight-in) = $\$540,150$
Retail: $\$337,500$ (Beg. Inv) + $\$493,500$ (Purchases) = $\$831,000$
2. Determine Ending Inventory at Retail:
Total Retail GAS ($\$831,000$) - Sales ($\$505,500$) = $\$325,500$
3. Calculate the Cost Ratio:
Total Cost GAS / Total Retail GAS:
$\$540,150 / \$831,000 = \mathbf{0.6500}$ (or 65%)
4. Convert Ending Inventory to Cost:
Ending Inventory at Retail ($\$325,500$) $\times$ Cost Ratio ($0.6500$) = $\$211,575$
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Cash Flow Math: Operating Activities
Cash Flow Math: Operating Activities
Starting Point:
Net Income: $71,000
(+)Non-Cash Add-back:
Depreciation: $17,100
(-)Asset Increases (Uses Cash):
Accounts Receivable: ($49,100)
Inventory: ($1,700)
(-)Liability Decreases (Uses Cash):
Accounts Payable: ($12,500)
Final Calculation:
$71,000 + 17,100 - 49,100 - 1,700 - 12,500 = $24,800
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Cash Flow Math: Operating Activities
Cash Flow Math: Operating Activities
Starting Point:
Net Income: $71,000
(+) Non-Cash Add-back:
Depreciation: $17,100
(-) Asset Increases (Uses Cash):
Accounts Receivable: ($49,100)
Inventory: ($1,700)
(-) Liability Decreases (Uses Cash):
Accounts Payable: ($12,500)
Final Calculation:
$71,000 + 17,100 - 49,100 - 1,700 - 12,500 = $24,800
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Purchase price
$1,267,000
Basic 2024 equity accrual ($323,000 × 30%)
96,900
Amortization of copyright:
Excess payment ($1,267,000 − $883,000 = $384,000) to copyright allocated over 10 years remaining life
(38,400)
Dividends ($55,000 × 30%)
(16,500)
Investment account balance at year end
$1,309,000
Soriano Company Acquisition: Journal Entries
Soriano Company Acquisition: Journal Entries
1. Acquisition with Bargain Purchase (Cash Payment: $665,800)
Step: Record all assets at Fair Value, including the In-Process R&D asset.
Contingent Liability: Record the present value of the potential extra payment ($36,300).
Result: Since the fair value of net assets acquired exceeds the consideration paid, record a Gain on Bargain Purchase ($23,600).
2. Acquisition with Goodwill (Cash Payment: $785,200)
Step: Record assets and liabilities at Fair Value as in the first entry.
Result: Since the price paid ($785,200) plus the contingent liability exceeds the fair value of the net assets, record the difference as Goodwill ($95,800).
3. Acquisition Costs (Professional Services)
Rule: Costs paid to investment banks or for legal/accounting services are expensed immediately.
Entry: Debit Professional services expense and Credit Cash for $143,500.
ity Method Journal Entries (Alamar Corp & Burks Inc)
ity Method Journal Entries (Alamar Corp & Burks Inc)
1. Record Initial Investment (Jan 1)
Debit: Investment in Burks, Incorporated $231,000
Credit: Cash $231,000
Step: Record the purchase of the 37% interest at cost.
2. Record Share of Net Income
Calculation: $\$85,000$ (Net Income) $\times$ $37\%$ = $31,450
Debit: Investment in Burks, Incorporated $31,450
Credit: Equity in investee income $31,450
Step: Increase the investment account by the proportionate share of the investee's earnings.
3. Record Dividends Declared
Calculation: $\$25,000$ (Dividends) $\times$ $37\%$ = $9,250
Debit: Dividend receivable $9,250
Credit: Investment in Burks, Incorporated $9,250
Step: Reduce the investment account because dividends represent a return of the investment.
4. Record Receipt of Cash Dividends
Debit: Cash $9,250
Credit: Dividend receivable $9,250
5. Intra-Entity Inventory Sale
Result: No journal entry required for the sale itself under the equity method (unless calculating the deferral of unrealized profit at year-end, which is not shown in this specific journalizing step).
Consolidation Calculations: Padre & Son
Consolidation Calculations: Padre & Son
Inventory: $472,500 + $301,700 = $774,200
Land: $688,000 + $173,000 = $861,000
Buildings: $777,500 + $372,300 = $1,149,800
Franchise: $235,000 + $240,300 = $475,300
Total Assets: $1,500,000 + $800,000 = $2,300,000
Cash Paid: $329,000
Stock Value: $440,000
Total Consideration: $329,000 + $440,000 = $769,000
Fair Value Assets: $769,000 - $83,800 = $685,200
Goodwill: $769,000 - $685,200 = $83,800
Revenues: $1,048,250 (Parent only)
Expenses: $687,350 (Parent only)
Net Income: $1,048,250 - $687,350 = $360,900
Retained Earnings: $451,000 (Parent only)
Dividends: $110,000 (Parent only)
Common Stock: $510,000 + $220,000 = $730,000
New APIC: $220,000 - $8,400 = $211,600
Total APIC: $70,000 + $211,600 = $281,600
Total Liabilities: $610,000 + $419,800 = $1,029,800
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Joseph Addo Accounting Professional & MACU Student
Welcome to my accounting tutorial portal. I am currently an accounting student at Mid-America Christian University (MACU), focusing on mastering financial reporting and managerial accounting. With professional experience in corporate environments like Walmart and Walkers, I understand the importance of accuracy in financial data. My goal for this site is to provide clear, step-by-step guides for students and professionals navigating the world of accounting.
Tax Return - 100% Accuracy Score
Tax Return - 100% Accuracy Score
Tax Return - Problem 14: C corporation
Please use 2025 tax law.
Required:
Please complete Express Catering, Inc.’s 2025 Form 1120, U.S. Corporation Income Tax Return, based
upon the information provided below. If required information is missing, use reasonable assumptions to
Fill in the gaps.
Facts:
Express Catering, Inc. (EC) is organized in the state of New York as a corporation and is taxed as a “C”
corporation with a calendar year-end. EC operates a delicatessen/bakery in New York City, NY, that
specializes in mobile food catering for events and gatherings within the tri-state area. EC’s address
(unchanged since inception), employer identification number (EIN), and date of incorporation are as
follows:
Express Catering, Inc.
257 West 55th Avenue
New York City, NY 10027
EIN: 13-9823459
Date of Incorporation: March 17, 2015
EC’s address has not changed since its inception.
EC has been rapidly expanding its catering business. This expansion has required a significant amount of
new equipment purchases. EC sold some of its liquid investments in order to avoid having to take on
debt to fund these purchases. Further, EC invested heavily in its catering business by significantly
increasing its advertising budget. EC and its officers expect that revenue increases from these
Expenditures will begin next year.
Four related shareholders from the same family have owned EC for the entire year: Raphael Giordano (father) and his three children, Silvia, Andrea, and Marco. Raphael
Giordano (father) and his three children, Silvia, Andrea, and Marco. None of EC’s shareholders are non-
U.S. persons. There are currently 10,000 shares of EC common stock issued and outstanding (EC has
never issued preferred stock).
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
The shareholders are also employees of EC and its only corporate officers. The relevant shareholder and
Officer information for the current year is provided below. Officer compensation is included in Employee
Salaries on the income statement. Their personal information is provided below:
Raphael Giordano
160 West 57th Avenue
New York City, NY 10027
SSN: 356-87-4322
Shares owned: 5,500
100% of time devoted to the business, compensation of $150,000
Silvia Giordano Costa
250 South Main
Hoboken, New Jersey 07030
SSN: 284-58-4583
Shares owned: 1,500
100% of time devoted to the business, compensation of $130,000
Andrea Giordano
65 East 55th Avenue
New York City, NY 10027
SSN: 423-84-2343
Shares owned: 1,500
100% of time devoted to the business, compensation of $130,000
Marco Giordano
160 West 57th Avenue
New York City, NY 10027
SSN-487-27-4797
Shares owned: 1,500
100% of time devoted to the business, compensation of $120,000
EC follows the accrual method of accounting (GAAP) and is not a member of any consolidated or
affiliated group of entities. EC is not audited by a CPA firm and has never had to restate its financial statements.
statement information.
Supplementary Details:
● The dividends received by EC during the year were paid by Apple, Inc. (EC owns less than 20% of
Apple, Inc.’s stock).
● EC had its sole municipal bond (New York City) redeemed (bought back) in the current year. EC
originally purchased the New York City bonds on February 1, 2018, for $100,000 (no premium or
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
discount paid). The bond was redeemed by New York City on February 1, 2025, for $100,000.
Both tax basis and proceeds received on this transaction were reported to EC on Form 1099-B.
● EC purchased 200 shares of Apple, Inc. on October 10, 2018, for $100,000 (including
commission). On July 10 of the current year, EC sold the 200 shares of Apple, Inc. for $350 a share.
share (including commission). Both tax basis and proceeds received on this transaction were
reported to EC on a form 1099-B.
● During the year, EC contributed $8,000 to the American Lung Association.
● EC's inventory purchases for 2024 were $1,166,850. No labor costs were included in COGS.
● On December 10, EC paid Madison Advertising $27,500 to design a new catering advertisement
campaign for next year. This money represented half of the total $55,000 contract price. EC
expects that the services will be provided and delivered to EC on about June 30, 2026.
● EC prepaid an insurance premium of $21,000 in September. The new policy is effective from
October 1, 2025, through September 30, 2026.
● EC’s regular tax depreciation on assets acquired prior to 2025 is correctly calculated at
$350,000.
● EC acquired the following new fixed assets from unrelated parties in 2021:
Description Date Purchased Amount
5-year MACRS Property May 2, 2024: $480,000
7-year MACRS Property September 10, 2024: $320,000
Delivery Truck (over
6,000 lbs): 5-year
MACRS Property
October 12, 2024: $40,000
● EC reports employee compensation amounts that remained unpaid at year-end in Accrued
Bonuses, Accrued Vacation, and Accrued Wages on the balance sheet, as applicable. The table
Below provides a summary of the balances in these accounts for December 31, 2024 and 2025.
Balance
Sheet Date Account Description Account Balance Applicable Employees, Payment
Date
12/31/2024 Accrued Bonuses $45,000 EC’s Shareholders
(father and children) 01/20/2025
12/31/2024 Accrued Vacation $62,500 Unrelated Employees 04/01/2025 –
11/30/2025
12/31/2024 Accrued Wages $44,500 EC’s Shareholders
(father and children) 01/20/2025
12/31/2025 Accrued Vacation $73,000 Unrelated Employees Unpaid as of
03/15/2026
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
12/31/2025 Accrued Wages $51,500 EC’s Shareholders
(father and children) 01/22/2026
Supplementary Details (continued):
● On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering
event services on March 18, 2025, at the insurance company’s annual meeting in New York City.
The deposit is fully refundable until January 15, 2026. Thereafter, half of the deposit becomes
non-refundable.
● Meal expenses were incurred for clients and EC staff at important meetings where business was
conducted. EC did not incur any entertainment-related expenses in 2025.
● EC values its inventory at cost and has always used the specific identification method for
reporting purposes. The company has never written down any inventory for any reason, and the
The rules of Section 263A (UNICAP) do not apply to EC.
● EC made the following estimated Federal income tax payments:
o April 15th, 2025: $2,000
o September 15th, 2025: $2,000
o June 15th, 2025: $2,000
o December 15th, 2025: $1,000
● If applicable, EC wants any overpayment refunded.
Miscellaneous Information:
● EC did not make any dividend distributions or distributions in excess of current and accumulated
earnings and profits during the current year.
● EC does not have any net operating loss carryforward amounts available for the current year.
● EC has never issued publicly offered debt instruments.
● EC is not required to file a Schedule UTP, Uncertain Tax Position Statement.
● EC made several payments during the current year that were required to be reported on forms.
1099-NEC; all required Forms 1099 were filed timely by EC.
● EC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or tax-
deferred transaction.
● EC did not receive any assets in Section 351 transfers during the year.
● EC’s average annual gross receipts have never exceeded $26 million annually.
● Assume bonus depreciation for 2025 is limited to 60% of the asset cost.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Express Catering, Inc.
Financial Statements (kept on a GAAP basis):
Balance Sheet
Assets: 12/31/2024 12/31/2025
Cash: $62,500, $1,037,000
Accounts Receivable 145,000 177,000
Less: Allowance for Bad Debts (32,000) (41,000)
Inventory: 59,000 96,000
Publicly traded securities: 100,000 0
Tax-exempt bond: 100,000.00
U.S. Treasury Bonds: 125,000 125,000
Fixed Assets: 2,115,000 2,955,000
Less: Acc. Depreciation (436,500) (715,000)
Prepaid Insurance 0 15,750
Prepaid Rent: 38,500 39,500
Prepaid Advertising 0 27,500
Total Assets: $2,276,500 $3,716,750
Liabilities and Shareholders’ Equity:
Accounts Payable 100,300 131,000
Accrued Bonuses: 45,000, 0
Accrued Vacation: 62,500 73,000
Accrued Wages: 44,500 51,500
Event Deposits: 0 to 100,000
Income Tax Payable: $0, $46,820
Deferred Tax Liability 45,910 14,000
Note Payable-First Bank of NY (Credit Line): 424,000 657,000
Note Payable-EG Capital Equipment Leasing: 1,243,000 1,415,000
Capital Stock 1,000 1,000
Additional paid-in capital: 99,000 99,000
Retained Earnings—Unappropriated 211,290 1,128,430
Total Liabilities and Shareholders’ Equity: $2,276,500 $3,716,750
U.S. Corporation Income Tax Return (Form 1120)
U.S. Corporation Income Tax Return (Form 1120)
Income
Figures
Line 1a
Gross receipts or sales
$3,925,000
Line 1b
Returns and allowances
$8,500
Line 1c
Balance (Subtract 1b from 1a)
$3,916,500
Line 2
Cost of goods sold (attach Form 1125-A)
$1,129,850
Line 3
Gross profit (Subtract 2 from 1c)
$2,786,650
Line 4
Dividends and inclusions
$2,800
Line 5
Interest
$3,150
Line 11
Total income
$2,792,600
Export to Sheets
Deductions
Figures
Line 12
Compensation of officers
$530,000
Line 13
Salaries and wages
$213,500
Line 14
Repairs and maintenance
$19,000
Line 15
Bad debts
$44,000
Line 16
Rents
$230,000
Line 17
Taxes and licenses
$77,000
Line 18
Interest
$180,000
Line 19
Charitable contributions
$53,284
Line 20
Depreciation (Form 4562)
$1,190,000
Line 22
Advertising
$42,500
Line 24
Employee benefit programs
$24,000
Line 25
Energy-efficient commercial buildings deduction
$173,050
Line 26
Other deductions
$173,050
Line 27
Total deductions
$2,736,334
Export to Sheets
Tax and Payments
Figures
Line 28
Taxable income before NOL and special deductions
$56,266
Line 29b
Special deductions
$1,400
Line 29c
Total NOL and Special deductions
$1,400
Line 30
Taxable income (Subtract 29¢ from 28)
$54,866
Line 31
Total tax
$11,522
Line 33
Total payments and credits
$7,000
Line 35
Amount owed
$4,522
Export to Sheets
Assets
(a) Beginning of tax year
(b) Beginning of tax year
(c) End of tax year
(d) End of tax year
1 Cash
173,000
230,225
2a Trade notes and accounts receivable
282,500
315,000
b Less allowance for bad debts
(12,000)
270,500
(18,000)
297,000
3 Inventories
325,000
345,500
4 Tax-exempt securities
35,000
35,000
5 Other current assets (attach statement)
140,000
125,000
6 Loans to shareholders
0
0
7 Mortgage and real estate loans
0
0
8 Other investments (attach statement)
0
0
9a Buildings and other depreciable assets
3,250,000
3,925,000
b Less accumulated depreciation
(812,500)
2,437,500
(1,129,850)
2,795,150
10a Depletable assets
0
0
b Less accumulated depletion
(0)
0
(0)
0
11 Land (net of any amortization)
215,000
215,000
12a Intangible assets (amortizable only)
0
0
b Less accumulated amortization
(0)
0
(0)
0
13 Other assets (attach statement)
12,500
18,500
14 Total assets
3,608,500
4,061,375
Liabilities and Shareholders' Equity
(b) Beginning of tax year
(d) End of tax year
15 Accounts payable
185,000
212,000
16 Mortgages, notes, bonds payable in less than 1 year
85,000
92,500
17 Other current liabilities (attach statement)
42,000
55,000
18 Loans from shareholders
0
0
19 Mortgages, notes, bonds payable in 1 year or more
1,500,000
1,250,000
20 Other liabilities (attach statement)
25,000
45,500
21 Capital stock: a Preferred stock
0
0
b Common stock
1,000,000
1,000,000
22 Additional paid-in capital
300,000
300,000
23 Retained earnings—Appropriated (attach statement)
0
0
24 Retained earnings—Unappropriated
471,500
1,106,375
25 Adjustments to shareholders' equity (attach statement)
0
0
26 Less cost of treasury stock
0
0
27 Total liabilities and shareholders' equity
3,608,500
4,061,375
Schedule M-1 Reconciliation
Schedule M-1 Reconciliation
Reconciliation of Income (Loss)
Figures
Line 1
Net income (loss) per books
917,140
Line 2
Federal income tax per books
21,910
Line 3
Excess of capital losses over capital gains
30,000
Line 5c
Travel and entertainment (non-deductible)
1,700
Line 7
Tax-exempt interest
1,400
Line 8a
Depreciation (book vs tax)
911,500
Line 8b
Charitable contributions (carryover)
2,984
Line 10
Income (page 1, line 28)
54,866
Schedule M-2 Analysis of Unappropriated Retained Earnings per Books (Schedule L, Line 25)
1 Balance at beginning of year . . . . .
2 Net income (loss) per books . . . . . .
3. Other increases (itemize):
4. Add lines 1, 2, and 3 .
5 Distributions: a Cash . . . . .
b. Stock . . . .
c. Property . . . .
6 Other decreases (itemize):
7. Add lines 5 and 6 . . . . . .
8 Balance at end of year (line 4 less line 7)
Form 1120 (2025)
Step 1: Determine the Group’s Apportionable Business Income
Sum of Sharon, Carol, Josey, and Janice’s business income:
$69,000 + 49,500 + 19,000 + 18,900 = \mathbf{\$156,400}$
Step 2: Calculate the Weighted Apportionment Factor (State X)
Property Factor: $(55,000 + 21,500 + 10,400) / 300,150 = \mathbf{0.2895}$
Payroll Factor: $(12,900 + 17,600) / 111,050 = \mathbf{0.2747}$
Sales Factor: $(81,700 + 16,400 + 13,200 + \text{Throwback Sales}) / 330,300 = \mathbf{0.3704}$
Average Factor: $(0.2895 + 0.2747 + 0.3704) / 3 = \mathbf{0.3115}$
Step 3: Apply Apportionment to Each Nexus Entity
Sharon Inc: $(\$156,400 \times \text{Sharon's specific factor}) + \$1,580 \text{ (Dividends)} = \mathbf{\$50,329}$
Carol Corp: $\$156,400 \times \text{Carol's specific factor} = \mathbf{\$10,702}$
Janice Corp: $\$156,400 \times \text{Janice's specific factor} = \mathbf{\$3,483}$
Josey Corp: Physical presence is $0$; therefore, taxable income is $0.
Step 4: Final Tax Calculation
Total State X Taxable Income: $\$50,329 + \$10,702 + \$3,483 = \mathbf{\$64,514}$
State X Tax Liability: $\$64,514 \times 15\% = \mathbf{\$9,677}$
PROB: Unitary Group Tax Liability (State X)
PROB: Unitary Group Tax Liability (State X)
1. Total Group Income
Business Income: $69,000 + 49,500 + 19,000 + 18,900 = \mathbf{\$156,400}$
Non-Business (Dividends): Only Sharon’s $1,580 is allocated to State X.
2. State X Apportionment Factors
Property Factor: $86,900 \div 300,150 = \mathbf{0.2895}$
Payroll Factor: $30,500 \div 111,050 = \mathbf{0.2747}$
Sales Factor: $122,300 \div 330,300 = \mathbf{0.3704}$
Average Factor: $(0.2895 + 0.2747 + 0.3704) \div 3 = \mathbf{0.3115}$
3. Taxable Income by Entity
Sharon: $(\$156,400 \times 0.3115) + \$1,580 = \mathbf{\$50,329}$
Carol: Apportioned share = $10,702
Janice: Apportioned share = $3,483
Josey: No Nexus in State X = $0
4. Final Group Tax Liability
Total State X Taxable Income: $64,514
Tax Rate: 15%
Calculation: $\$64,514 \times 0.15 = \mathbf{\$9,677}$
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