On February 1, 2018 Love Corporation (Love) is formed by Naomi and Dominic. On the day of the Love’s formation Naomi and Dominic contributed:
Naomi:
- Various Services with a FMV of $12,920
- $101,745 of Cash
Naomi received 4,970 shares of common stock in return.
Dominic:
- $46,835 of Cash
Dominic received 2,030 shares of common stock in return.
Between February 1 and April 1 of 2018 Love injured compensation costs and marketing costs in preparation to launch the business.
- Compensation costs = $34,812
- Marketing costs = $14,219
Love started business activities on April 1 2018.
Between April 1 and May 1 of 2018, Love incurred $20,045 of compensation costs for the development of computer software. Love will start any amortization of its software costs for tax purposes on May 1.
The following transactions took place on May 18, 2018:
- Victoria contributed an office building, with a fair market value of $289,886, to Love in exchange for 16,987 shares of common stock and Love’s assumption of a $48,314 liability of Victoria. Victoria incurred the liability to purchase the building on August 17, 2016, at a cost of $152,000, for its original use in Victoria’s business. For book purposes, Love uses a straight-line depreciation method for the building and treats the building as having a $14,000 residual (salvage) value and 42-year service (useful) life measured from the date of its contribution.
- Alexander contributed office furniture, with a fair market value of $129,544, to Love in exchange for 7,786 shares of common stock and $18,823 of cash. Alexander purchased the furniture (new) for $160,700 on July 24, 2016, for use in Alexander’s business. For book purposes, Love uses a sum-of-the-years-digits depreciation method for the furniture and determined–immediately after the contribution–that the furniture would have a $5,000 residual (salvage) value and 9-year service (useful) life.
- Marin contributed computer equipment, with a fair market value of $112,734, to Love in exchange for 5,662 shares of common stock and Love’s assumption of a $32,210 liability of Marin. Marin incurred the liability to purchase the computers (new) on April 14, 2017, at a cost of $31,100, for use in Marin’s business. For book purposes, Love uses a 150% declining balance depreciation method for the computers and determined–immediately after the contribution–that the computers would have a $5,000 residual (salvage) value and 2-year service (useful) life.
- Shelby contributed 7% preferred stock and 9% preferred stock, issued by an unrelated company, to Love in exchange for 40,343 shares of Love common stock. Shelby purchased the 7% preferred stock–which had a fair market value of $459,883 on the date of contribution–for $475,855 on October 17, 2010. Shelby purchased the 9% preferred stock–which had a fair market value of $113,851 on the date of contribution–for $46,890 on May 24, 2014. Shelby had held the preferred stock for investment purposes. Love will hold the preferred stock, which is less than 4% of the unrelated company’s outstanding stock, as investment securities.
Notes for the Income Statement:
1) 2018 -> Love collected $12,432 service revenue for services preformed in 2018
2019 -> Love collected $53, 741 service revenue for services preformed in 2018 and 2019
2) 2018 -> Love wrote off $497 of receivables service revenue for services preformed in 2018
2019 -> Love wrote off $1,021 of receivables service revenue for services preformed in 2018 and 2019
(Love reduces its allowance for doubtful accounts by the amounts written off each year)
3) 2018 -> Love collected $288,000 for licensing fees
2019 -> Love collected $414,720 for licensing fees
4) All compensation costs and service costs are expended immediately
5) 2018 -> Love paid $230 for warranty costs
2019 -> Love paid $1,825 for warranty costs
6) Love sold the building and all of its office furniture to an unrelated buyer on March 28, 2019, in order to raise some needed cash. The buyer agreed to rent the building and furniture back to Love so Love could continue to use them in its business. During 2019, Love paid $8,700 to rent the building and $7,800 to rent the furniture for the remainder of the year.
7) 7% preferred stock had fair market values of $464,482 on December 31, 2018, and $413,389 on December 31, 2019. The 9% preferred stock had fair market values of $126,375 on December 31, 2018, and $126,375 on December 31, 2019.
Prepare an Excel workbook to compute Love’s taxable income for 2018 and 2019 using adjustments, if any, to each book item shown in the above income statements. The first worksheet should only contain (1) the book items (in the order shown above), the adjustments, and the resulting tax items for the computations of taxable income and (2) any other taxable income or expense items, which Love would take into account in determining taxable income. Separate worksheets should provide supporting ‘work papers’ to justify the adjustments and other items used to compute taxable income.
