You must determine whether a schedule m-3 is to be preparedCHAPTER 12 S CORPORATIONTAX RETURN PROBLEM 1 ( PAGE 12-42)Max Martin (111-11-1111), David Dorn (123-45-6789), and Sandra Smith (987-65-4321) are, respectively, 55%, 35%, and 10% owners of Cotton, Inc

You must determine whether a schedule m-3 is to be prepared

CHAPTER 12: S CORPORATION
TAX RETURN PROBLEM 1 ( PAGE 12-42)
Max Martin (111-11-1111), David Dorn (123-45-6789), and Sandra Smith (987-65-4321) are, respectively, 55%, 35%, and 10% owners of Cotton, Inc. (12-3456789), a textile manufacturing company located at 1824 Church Street, Concord, NC 28025. The company’s first S election was made on January 1, 1998. The following information was taken
from the financial income statement for 2012.

Interest income …………………………………………$ 230,000
Tax-exempt interest income………………….. 37,000
Gross sales……………………………………………. 241,000,000
Beginning inventory 500,000
Direct labor (45,000,000)
Direct materials purchased (25,000,000)
Ending inventory (900,000)
Taxes (payroll) (3,923,500)
Meals and entertainment (before 50% limitation) (79,000)
Fines on illegal activities (34,000)
Compensation to shareholder-officers (proportionate to
ownership) (2,820,910)
Salaries and wages (7,500,000)
Interest expense (1,722,200)
Bad debt expense (820,000)
Repairs expense (1,500,000)
Depreciation expense (1,615,400)
Advertising expense (425,000)
Pension plan contributions (600,000)
Employee benefit programs (287,500)
Other deductions (63,700)
Book income 150,275,790
A comparative balance sheet appears below.
January 1, 2012 December 31, 2012
Cash $ 4,784,000 $ ?
Accounts receivable 9,310,000 15,313,600
Inventories 500,000 900,000
Prepaid expenses 1,033,300 758,200
Loans to shareholders 31,300 72,700
Building and trucks 13,820,300 24,434,800
Accumulated depreciation (8,423,500) (?)
Land 180,900 1,651,300
Life insurance 1,156,600 1,834,400
Total assets $22,392,900 $182,247,590
Accounts payable $ 4,979,700 $ 8,296,500
Notes payable (less than one year) 512,200 898,900
Loans from shareholders 15,575,100 19,196,700
Notes payable (more than one year) 2,182,100 3,383,500
Loan on life insurance 531,200 1,620,600
Capital stock 100,300 100,300
Paid-in capital 955,900 955,900
Retained earnings (831,400) ?
Accumulated adjustments account -0- ?
Treasury stock (1,612,200) (1,612,200)
Total liabilities and capital $22,392,900 $182,247,590
You must determine whether a Schedule M-3 is to be prepared. Cotton’s accounting firm and the corporate books and records provide the following additional information.
Distributions to shareholders $1,890,000
Accumulated adjustments account (AAA), beginning balance (831,400)
• Salaries and wages include $1.2 million of deferred compensation.
• Of the bad debt expense, $230,000 is not deductible this year.
• Of other expenses, $3,700 is permanently not deductible.
Using the preceding information, prepare a complete Form 1120S and a Schedule K-1 for Max Martin, 1824 Church Street, Concord, NC 28025. If any information is miss-ing, make realistic assumptions.( Don’t need to file M-3)

You must determine whether a schedule m-3 is to be prepared
Accounting Basics