[lmillan08]

Hey everyone! I was working on the AICPA Sample test and have a question on one of the SIMS. Can someone tell me how the answer to line 2 – Ordinary Business income is $440,000. Here is the question:

Falcon, Inc., is a calendar-year-end S corporation owned equally by two shareholders, Jennifer Sullivan and Marvin Darby. Falcon reports its income and expenses on the accrual method of accounting. Falcon has always been an S corporation and has no debt. Falcon’s controller has provided information for the completion of Falcon’s year 4 Form 1120S, U.S. Income Tax Return for an S Corporation. A copy of Falcon’s income statement for the year ended December 31, year 4, and additional information related to Falcon and its shareholders can be found in the exhibits above.

1. Falcon’s year 4 ordinary business income (loss) to be reported on Form 1120S

Here is the income statement:

Sales

$ 1,200,000

Cost of goods sold

500,000

Gross profit

700,000

Salaries and wages

203,000

Repairs and maintenance

10,000

Depreciation expense

8,000

Charitable contributions

5,000

Payroll taxes

18,000

Penalties and fines

2,000

Business insurance

9,000

Total expenses

255,000

Income before other income (expense)

445,000

Other income (expense)

Bank interest income

1,000

Capital loss on sale of land

(20,000)

Total other income (expense)

(19,000)

Net income

$ 426,000

[CH89]

The best way to calculate the Ordinary Income is to understand what flows through the partners, and what is deductible to come to the conclusion of Ordinary Income. I haven't looked at this sample in a few months, but I think you're missing an important info, that is MACRS depreciation of 20,000. Anyways, this is how I get to Ordinary Income of 440,000.

Sales: 1,200,000
COGS: (500,000)
Wages: (203,000)
Repairs: (10,000)
MACRS: (20,000)
Payroll: (18,000)
Insurance : (9,000)
= Ordinary Business Income : 440,000

The other items are separately stated items, or not deductible (Penalties and fines.)

[chandler]

Really, this question just wants to see if you know ordinary income items vs. separately stated/non-deductible. You can do it the way CH89 suggested or back into it by starting with book income:
Book income: $426,000
Plus: capital loss (Sep. stated) $20,000
Less: interest income (Sep. stated) $(1,000)
Plus: penalties (non-deductible) $2,000
Plus: charitable contributions (sep.) $5,000
Plus: book depreciation: $8,000
Less: tax depreciation: $(20,000)
Ordinary Income: $440,000

[Tncincy]

Does this sim still exist. Looks like one to practice several times.

It begins with a 75
Been here too long as a cheerleader....ready to pass

[Author]

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