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tax problems




Question;Comprehensive Problems81.Joe;operates a business that locates and purchases specialized assets for;clients, among other activities. Joe uses the accrual method of;accounting but he doesn?t keep any significant inventories of the;specialized assets that he sells. Joe reported the following financial;information for his business activities during year 0. Determine the;effect of each of the following transactions on the taxable business;income.Joe has signed a contract to sell gadgets to the;city. The contract provides that sales of gadgets are dependent upon a;test sample of gadgets operating successfully. In December, Joe delivers;$12,000 worth of gadgets to the city that will be tested in March. Joe;purchased the gadgets especially for this contract and paid $8,500.Joe;paid $180 for entertaining a visiting out-of-town client. The client;didn?t discuss business with Joe during this visit, but Joe wants to;maintain good relations to encourage additional business next year.On;November 1, Joe paid $600 for premiums providing for $40,000 of ?key;man? insurance on the life of Joe?s accountant over the next 12 months.At;the end of the year (year 1), Joe?s business reports $9,000 of accounts;receivable. Based upon past experience, Joe believes that at least;$2,000 of his new receivables will be uncollectible.In December;of year 0, Joe rented equipment for a large job. The rental agency;required a minimum rental of three months ($1,000 per month), but Joe;completed the job before year-end.Joe hired a new sales;representative as an employee and sent her to Dallas for a week to;contact prospective out-of-state clients. Joe ended up reimbursing his;employee $300 for airfare, $350 for lodging, $250 for meals, and $150;for entertainment. Joe requires the employee to account for all;expenditures in order to be reimbursed.Joe uses his BMW (a;personal auto) to travel to and from his residence to his factory.;However, he switches to a business vehicle if he needs to travel after;he reaches the factory. Last month, the business vehicle broke down and;he was forced to use the BMW both to travel to and from the factory and;to visit work sites. He drove 120 miles visiting work sites and 46 miles;driving to and from the factory from his home.Joe paid a visit;to his parents in Dallas over the Christmas holidays. While he was in;the city, Joe spent $50 to attend a half-day business symposium. Joe;paid $200 for airfare, $50 for meals during the symposium, and $20 on;cab fare to the symposium.82.Jack;a geologist, had been debating for years whether or not to venture out;on his own and operate his own business. He had developed a lot of solid;relationships with clients and he believed that many of them would;follow him if he were to leave his current employer. As part of a New;Year?s resolution, Jack decided he would finally do it. In January, Jack;put his business plan together and in February, opened his doors for;business as a C corporation called Geo-Jack (GJ). Jack is the sole;shareholder. Jack reported the following financial information for the;year (assume GJ reports on a calendar year and uses the accrual method;of accounting).GJ incurred $3,000 of organizational expenditures in January.GJ earned and collected $290,000 performing geological-related services and selling its specialized digging tool [see part (i)].GJ received $50 interest from municipal bonds and $2,100 interest from other investments.GJ;purchased some new equipment in February for $42,500. It claimed;depreciation on these assets during the year in the amount of $6,540.GJ paid $7,000 to buy luxury season tickets for Jack?s parents for State U football games.GJ;paid Jack?s father $10,000 for services that would have cost no more;than $6,000 if Jack had hired any other local business to perform the;services. While Jack?s dad was competent, he does not command such a;premium from his other clients.In an attempt to get his name and new business recognized, GJ paid $7,000 for a one-page ad in theGeologic Survey.It also paid $15,000 in radio ads to be run through the end of December.GJ leased office space in a building downtown. GJ paid rent of $27,000 for the year.In;August, GJ began manufacturing a special geological digging tool that;it sells to wholesalers. GJ?s QPAI from the activity for the year is;$100,000 [included in revenues reported in part (b)]. GJ paid $10,000 of;wages to the employees working on the project during the year and its;cost of goods sold on the sales is $15,000. (Assume that taxable income;does not limit the amount of the DMD, and that no wages should be;included in cost of goods sold.) Remember that cost of goods sold and;wages reduce taxable income.In November, Jack?s office was;broken into and equipment valued at $5,000 was stolen. The tax basis of;the equipment was $5,500. Jack received $2,000 of insurance proceeds;from the theft.GJ incurred a $4,000 fine from the state government for digging in an unauthorized digging zone.GJ;contributed $3,000 to lobbyists for their help in persuading the state;government to authorize certain unauthorized digging zones.On;July 1, GJ paid $1,800 for an 18-month insurance policy for its business;equipment. The policy covers the period July 1, 2009 through December;31, 2010.GJ borrowed $20,000 to help with the company?s initial;funding needs. GJ used $2,000 of funds to invest in municipal bonds. At;the end of the year, GJ paid the $1,200 of interest expense that;accrued on the loan during the year.Jack lives 12 miles from;the office. He carefully tracked his mileage and drove his truck 6,280;miles between the office and his home. He also drove an additional 7,200;miles between the office and traveling to client sites. Jack did not;use the truck for any other purposes. He did not keep track of the;specific expenses associated with the truck. However, while traveling to;a client site, Jack received a $150 speeding ticket. GJ reimbursed Jack;for business mileage and for the speeding ticket.GJ purchased;two season tickets (20 games) to attend State U baseball games for a;total of $1,100. Jack took existing and prospective clients to the games;to maintain contact and find further work. This was very successful for;Jack as GJ gained many new projects through substantial discussions;with the clients following the games.GJ reimbursed employee-salespersons $3,500 for meals involving substantial business discussion.GJ;had a client who needed Jack to perform work in Florida. Because Jack;had never been to Florida before, he booked an extra day and night for;sightseeing. Jack spent $400 for airfare and booked a hotel for 3 nights;($120/night). (Jack stayed two days for business purposes and one day;for personal purposes.) He also rented a car for $45 per day. The client;arranged for Jack?s meals while Jack was doing business. GJ reimbursed;Jack for all expenses.Required:What is GJ?s taxable income for the year?As a C corporation, does GJ have a required tax year? If so, what would it be?If GJ were a sole proprietorship, would it have a required tax year-end? If so, what would it be?If GJ were an S corporation, would it have a required tax year-end? If so, what would it be?83.Rex;loves to work with his hands and is very good at making small;figurines. In 2005, Rex opened Bronze Age Miniatures (BAM) for business;as a sole proprietorship. BAM produces miniature characters ranging from;sci-fi characters (his favorite) to historical characters like George;Washington (the most popular). Business has been going very well for;him?so well, in fact, that he has decided to hire you to determine his;business (Schedule C) income for this year. Rex provided the following;information relating to his business.Rex received approval;from the IRS to switch from the cash method of accounting to the accrual;method of accounting effective January 1 of this year. At year-end of;last year, BAM reported accounts receivable that had not been included;in income under the accrual method of $14,000 and accounts payable that;had not been deducted under the accrual method of $5,000.In;March, BAM sold 5,000 miniature historical figures to History R Us, Inc.;(HRU), a retailer of historical artifacts and figurines, for $75,000.HRU;was so impressed with the figurines that it purchased in March that it;wanted to contract with BAM to continue to produce the figurines for;them for the next three years. HRU paid BAM $216,000 ($12 per figurine);on October 30 of this year, to produce 500 figurines per month for 36;months beginning on November 1 of this year. BAM delivered 500 figurines;on November 30 and again on December 30. Rex elects to use the deferral;method to account for the transaction.Though the sci-fi;figurines were not quite as popular, BAM sold 400 figurines at a sci-fi;convention in April. Rex accepted cash only and received $11,000 for;these sales.In January, BAM determined that it would not be;able to collect on $2,000 of its beginning-of-the-year receivables, so;it wrote off $2,000 of specific receivables. BAM sold 100,000 other;figurines on credit for $120,000. BAM estimates that it will be unable;to collect 5 percent of the sales revenue from these sales but it has;not been able to specifically identify any accounts to write off.Assume that BAM correctly determined that its cost of goods sold this year is $54,000.The;sci-fi convention in April was held in Chicago, Illinois. Rex attended;the convention because he felt it was a good opportunity to gain new;customers and to get new ideas for figurines. He paid $350 round-trip;airfare, $100 for entrance to the convention, $210 for lodging, $65 for;cab fare, and $110 for meals during the trip. He was busy with business;activities the entire trip.On August 1, BAM purchased a;12-month insurance policy that covers its business property for;accidents and casualties through July 31 of next year. The policy cost;BAM $3,600.BAM reported depreciation expense of $8,200 for this year.Rex;had previously operated his business out of his garage, but in January;he decided to rent a larger space. He entered into a lease agreement on;February 1 and paid $14,400 ($1,200 per month) to possess the space for;the next 12 months (February of this year through January of next year).Before;he opened his doors for business in 2005, Rex spent $30,000;investigating and otherwise getting ready to do business. He expensed;$5,000 immediately and is amortizing the remainder using the;straight-line method over 180 months.In December, BAM agreed to;a 12-month $8,000 contract with Advertise-With-Us (AWU) to produce a;radio ad campaign. BAM paid $3,000 up front (in December of this year);and AWU agreed that BAM would owe the remaining $5,000 only if BAM?s;sales increased by 15 percent over the nine-month period after the;contract was signed.In November of this year, BAM paid $2,500;in business property taxes (based on asset values) covering the period;December 1 of this year through November 30 of next year. In November of;last year, BAM paid $1,500 for business property taxes (based on asset;values) covering the period December 1 of last year through November 30;of this year.Required:Compute BAM?s business income.Complete a Schedule C for BAM (page 1 only).84.Bryan;followed in his father?s footsteps and entered into the carpet;business. He owns and operates I Do Carpet (IDC). Bryan prefers to;install carpet only, but in order to earn additional revenue, he also;cleans carpets and sells carpet cleaning supplies. Compute his taxable;income considering the following items:IDC contracted with a;homebuilder in December of last year to install carpet in 10 new homes;being built. The contract price of $80,000 includes $50,000 for;materials (carpet). The remaining $30,000 is for IDC?s service of;installing the carpet. The contract also stated that all money was to be;paid upfront. The homebuilder paid IDC in full on December 28 of last;year. The contract required IDC to complete the work by January 31 of;this year. Bryan purchased the necessary carpet on January 2 and began;working on the first home January 4. He completed the last home on;January 27 of this year.IDC entered into several other;contracts this year and completed the work before year-end. The work;cost $130,000 in materials. Bryan billed out $240,000 but only collected;$220,000 by year-end. Of the $20,000 still owed to him, Bryan wrote off;$3,000 he didn?t expect to collect as a bad debt from a customer;experiencing extreme financial difficulties.IDC entered into a;three-year contract to clean the carpets of an office building. The;contract specified that IDC would clean the carpets monthly from July 1;of this year through June 30 three years hence. IDC received payment in;full of $8,640 ($240 a month for 36 months) on June 30 of this year.IDC;sold 100 bottles of carpet stain remover this year for $5 per bottle;(it collected $500). Rex sold 40 bottles on June 1 and 60 bottles on;November 2. IDC had the following carpet cleaning supplies on hand for;this year and it uses the LIFO method of accounting for inventory:Purchase DateBottlesTotal CostNovember last year40$120February this year35$112July this year25$ 85August this year40$140Totals140$457On August 1 of this year, IDC needed more room for storage and paid $900 to rent a garage for 12 months.On;November 30 of this year, Bryan decided it was time to get his logo on;the sides of his work van. IDC hired We Paint Anything, Inc. (WPA), to;do the job. It paid $500 down and agreed to pay the remaining $1,500;upon completion of the job. WPA indicated it wouldn?t be able to begin;the job until January 15 of next year, but the job would only take one;week to complete. Due to circumstances beyond its control, WPA wasn?t;able to complete the job until April 1 of next year, at which time IDC;paid the remaining $1,500.In December, Bryan?s son, Aiden;helped him finish some carpeting jobs. IDC owed Aiden $600 (reasonable);compensation for his work. However, Aiden did not receive the payment;until January of next year.IDC also paid $1,000 for interest on;a short-term bank loan relating to the period from November 1 of this;year through March 31 of next year.85.Hank;started a new business in June of last year, Hank?s Donut World (HW for;short). He has requested your advice on the following specific tax;matters associated with HW?s first year of operations. Hank has;estimated HW?s income for the first year as follows:Revenue:Donut sales$252,000Catering revenues71,550$323,550Expenditures:Donut supplies$124,240Catering expense27,910Salaries to shop employees52,500Rent expense40,050Accident insurance premiums8,400Other business expenditures6,850?259,950Net Income$ 63,600HW;operates as a sole proprietorship and Hank reports on a calendar-year.;Hank uses the cash method of accounting and plans to do the same with HW;(HW has no inventory of donuts because unsold donuts are not salable).;HW does not purchase donut supplies on credit nor does it generally make;sales on credit. Hank has provided the following details for specific;first-year transactions.A small minority of HW clients;complained about the catering service. To mitigate these complaints;Hank?s policy is to refund dissatisfied clients 50 percent of the;catering fee. By the end of the first year, only two HW clients had;complained but had not yet been paid refunds. The expected refunds;amount to $1,700, and Hank reduced the reported catering fees for the;first year to reflect the expected refund.In the first year, HW;received a $6,750 payment from a client for catering a monthly;breakfast for 30 consecutive months beginning in December. Because the;payment didn?t relate to last year, Hank excluded the entire amount when;he calculated catering revenues.In July, HW paid $1,500 to;ADMAN Co. for an advertising campaign to distribute fliers advertising;HW?s catering service. Unfortunately, this campaign violated a city code;restricting advertising by fliers, and the city fined HW $250 for the;violation. HW paid the fine, and Hank included the fine and the cost of;the campaign in ?other business? expenditures.In July, HW also;paid $8,400 for a 24-month insurance policy that covers HW for accidents;and casualties beginning on August 1 of the first year. Hank deducted;the entire $8,400 as accident insurance premiums. In his estimate, Hank;deducted these amounts ($40,050 in total) as rent expense.On;May of the first year, Hank signed a contract to lease the HW donut shop;for 10 months. In conjunction with the contract, Hank paid $2,000 as a;damage deposit and $8,050 for rent ($805 per month). Hank explained that;the damage deposit was refundable at the end of the lease. At this;time, Hank also paid $30,000 to lease kitchen equipment for 24 months;($1,250 per month). Both leases began on June 1 of the first year.Hank;signed a contract hiring WEGO Catering to help cater breakfasts. At;year-end, WEGO asked Hank to hold the last catering payment for the;year, $9,250, until after January 1 (apparently because WEGO didn?t want;to report the income on its tax return). The last check was delivered;to WEGO in January after the end of the first year. However, because the;payment related to the first year of operations, Hank included the;$9,250 in last year?s catering expense.Hank believes that the;key to the success of HW has been hiring Jimbo Jones to supervise the;donut production and manage the shop. Because Jimbo is such an important;employee, HW purchased a ?key-employee? term-life insurance policy on;his life. HW paid a $5,100 premium for this policy and it will pay HW a;$40,000 death benefit if Jimbo passes away any time during the next 12;months. The term of the policy began on September 1 of last year and;this payment was included in ?other business? expenditures.In;the first year, HW catered a large breakfast event to celebrate the;city?s anniversary. The city agreed to pay $7,100 for the event, but;Hank forgot to notify the city of the outstanding bill until January of;this year. When he mailed the bill in January, Hank decided to discount;the charge to $5,500. On the bill, Hank thanked the mayor and the city;council for their patronage and asked them to ?send a little more;business our way.? This bill is not reflected in Hank?s estimate of HW?s;income for the first year of operations.Required:Hank;files his personal tax return on a calendar year, but he has not yet;filed last year?s personal tax return nor has he filed a tax return;reporting HW?s results for the first year of operations. Explain when;Hank should file the tax return for HW and calculate the amount of;taxable income generated by HW last year.Determine the taxable income that HW will generate if Hank chooses to account for the business under the accrual method.Describe how your solution might change if Hank incorporated HW before he commenced business last year.86.R.E.M.;a calendar-year corporation and Athens, Georgia, band, recently sold;tickets ($20,000,000) for concerts scheduled in the United States for;next year and the following year. For financial statement purposes;R.E.M. will recognize the income from the ticket sales when it perform;the concerts. For tax purposes, it uses the accrual method and would;prefer to defer the income from the ticket sales until it performs the;concerts. This is the first time that it has sold tickets one or two;years in advance. Michael Stipe has asked your advice. Write a memo to;Michael explaining your findings.


Paper#39351 | Written in 18-Jul-2015

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