Question

Statutory Tax Rate versus Effective Tax Rate difference......

Schedule M1 (CT1) and M2 (CT2) For Rocky Mountain Equipment Corporation Form 1120-F The Rocky Mountain Equipment Corporation, a Colorado Corporation, was formed by two Colorado State University business school graduates. The Rocky Mountain Equipment Corporation incorporated on October 20, 1974. The main line of business is selling recreational equipment to outdoor enthusiasts. Starting in their parents’ garage, they have grown the corporation to a multimillion dollar business. To comply with accounting requirements, the company uses an accrual method of accounting. Its accumulated earnings and profits as of December 31, 2016, were $1,200. It made cash distributions during its 2016 calendar tax year of $140,089. This consisted of $85,089 to preferred shareholders and $55,000 to common shareholders. The entire distribution to preferred shareholders is a taxable dividend. The $27,500 distribution on March 15, 2016, to common shareholders is a taxable dividend to extent of $27,318 (99.33%), and the $27,500 distribution on September 15, 2016, to common shareholders is a taxable dividend to the extent of $26,118 (94.97%). The following profit and loss account appeared in the books of the Rocky Mountain Equipment Corporation for calendar year 2016. It is required to file Form 1120 and completes Form 1120-F (M-1 and M-2). Account Debit Credit Gross sales $1,840,000 Sales returns and allowances $20,000 Cost of goods sold 1,520,000 Interest income from: Banks $10,000 Tax-exempt state bonds 5,000 15,000 Proceeds from life insurance (death of corporate officer) 6,000 Bad debt recoveries (no tax deduction claimed) 3,500 Insurance premiums on lives of corporate officers (corporation is beneficiary of policies) 9,500 Compensation of officers 40,000 Salaries and wages 28,000 Repairs 800 Taxes 10,000 Contributions: Deductible $23,000 Other 500 23,500 Interest paid (loan to purchase tax-exempt bonds) 850 Depreciation 5,200 Loss on securities 3,600 Net income per books after federal income tax 140,825 Federal income tax accrued for 2016 62,225 Total $1,864,500 $1,864,500 The corporation analyzed the retained earnings and the following items appeared in this account on its books. Item Debit Credit Balance, January 1 $225,000 Net profit (before federal income tax) 203,050 Reserve for contingencies $10,000 Income tax accrued for the year 62,225 Dividends paid during the year 140,089 Refund of 1995 income tax 18,000 Balance, December 31 233,736 Total $446,050 $446,050 The following items appear on page 1 of Form 1120. Gross sales ($1,840,000 less returns and allowances of $20,000) $1,820,000 Cost of goods sold 1,520,000 Gross profit from sales $300,000 Interest income 10,000 Total income $310,000 Deductions: Compensation of officers $40,000 Salaries and wages 28,000 Repairs 800 Taxes 10,000 Contributions (maximum allowable) 22,500 Depreciation 6,200 Total deductions 107,500 Taxable income $202,500 Please prepare Schedule M-1 for Rocky Mountain Equipment Corporation using the financial information and the Form 1120 line items provided above. Please prepare Schedule M-2 for Rocky Mountain Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.

Answer 1

Schedule M1		Amount
Net income as per books		140825
Federal income tax as per books		62225
Excess of capital loss over capital gain		3600
Income subject to tax not in books
Expenses on books but not in return
a.depreciation
b. Charitable contribution		1000
c travel
d. Other - interest for tax free bonds		10350
Add lines 1 to 5		218000
Income not included in return
a. Tax exempt interest		5000
b. Other		9500
8.deductions not charged in books

a. Depreciation		1000
9. Add line 7 and 8		15500
Income - line 6 less line 9		202500

Schedule M2

Analysis of unappropriates retained earnings

Opening balance		225000
Net income as per books		140825
Other increase - tax refund		18000
4.Add lines 1 ,2 and 3		383825
5.Distributions - cash		140089
Stock
Property
6. Other decreases - reserve		10000
7.Add lines 5 and 6		150089
8. Balance at year end (4-7)		233736

Retained earnings as per tax return reconciliation table

Opening accumulated earning and profit		1200
Add taxable income as per books		140825
Less - bad debt recovered of previous year		(3500)
Current year profits		137325
Profit distribution
Preference dividend from current year		(85089)
Common dividend
94.97% of 27500		(26118)
94.97% of 27500		(26118)
Current year balance profits -		Zero
Dividend charged to accumulated profits		(1200)
Dividend charged to capital (55000-26118-26118-1200)		1564
Accumulated profits balance		0