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tax- Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service




Question;37. LO.2 Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the company?s2013 gross income assuming that the company uses any available options to defer its taxes.a. In December 2012, the company received a $1,200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2013, and Drake immediately delivered it to the customer. The sale was reported in 2013 for financial accounting purposes.b. In October 2013, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 in July 2013.c. On December 31, 2013, the company sold an appliance for $1,200. The company received $500 cash and a note from the customer for $700 and $260 interest, to be paid at the rate of $40 a month for 24 months. Because of the customer?s poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750.38. LO.2, 5 Freda is a cash basis taxpayer. In 2013, she negotiated her salary for 2014. Her employer offered to pay her $21,000 per month in 2014 for a total of $252,000. Freda countered that she would accept $10,000 each month for the 12 months in 2014 and the remaining $132,000 in January 2015. The employer accepted Freda?s terms for 2014 and 2015.a. Did Freda actually or constructively receive $252,000 in 2014?b. What could explain Freda?s willingness to spread her salary over a longer period of time?c. In December 2014, after Freda had earned the right to collect the $132,000 in 2015, the employer offered $133,000 to Freda at that time, rather than $132,000 in January 2015. The employer wanted to make the early payment so as to deduct the expense in 2014. Freda rejected the employer?s offer. Was Freda in constructive receipt of the income in 2014? Explain.39. LO.2, 5 The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent.a. Discuss the tax effects of the following alternatives:? $1,000 damage deposit with no rent prepayment.? $500 damage deposit and $500 rent for the final month of the lease.? $1,000 rent for the final two months of the lease and no damage deposit.b. Which option do you recommend? Why?40. LO.3 Rusty has been experiencing serious financial problems. His annual salary was $100,000, but a creditor garnished his salary for $20,000, so the employer paid the creditor (rather than Rusty) the $20,000. To prevent creditors from attaching his investments,Rusty gave his investments to his 21-year-old daughter, Rebecca. Rebecca received $5,000 in dividends and interest from the investments during the year. Rusty transferred some cash to a Swiss bank account that paid him $6,000 interest during the year. Rusty did not withdraw the interest from the Swiss bank account. Rusty also hid some of his assets in his wholly owned corporation that received $150,000 rent income but had $160,000 in related expenses, including a $20,000 salary paid to Rusty. Rusty reasons that his gross income should be computed as follows:Salary received $ 80,000Loss from rental property ($150,000? $160,000) (10,000)Gross income $ 70,000Compute Rusty?s correct gross income for the year, and explain any differences between your calculation and Rusty?s.41. LO.2, 3 Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Troy is a full-time employee of the corporation and receives a salary of $60,000 per year. He also receives a bonus equal to 10% of all collections from clients he serviced during the year. Determine the tax consequences of the following events to the corporation and to Troy:a. On December 31, 2013, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2013. Troy did not deliver the check to the corporation until January 2014.b. The facts are the same as in (a), except that the corporation is an accrual basis taxpayer and Troy deposited the check on December 31, but the bank did not add the deposit to the corporation?s account until January 2014.c. The facts are the same as in (a), except that the customer told Troy to hold the check until January 2014 when the customer could make a bank deposit that would cover the check.42. LO.3, 4 Faye, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The partnership profits for the tax year were $270,000. Changes in their capital accounts during the tax year were as follows:Faye Gary Heidi TotalBeginning balance $ 50,000 $ 50,000 $ 50,000 $150,000Withdrawals (20,000) (35,000) (10,000) (65,000)Additional contributions ?0? ?0? 5,000 5,000Allocation of profits 90,000 90,000 90,000 270,000Ending balance $120,000 $105,000 $135,000 $360,000In arriving at the $270,000 of partnership profits, the partnership deducted $2,400 ($800 for each partner) in premiums paid for group term life insurance on the partners.Faye and Gary are 39 years old, and Heidi is 35 years old. Other employees are also eligible for group term life insurance equal to their annual salary. These premiums of $10,000 have been deducted in calculating the partnership profits of $270,000. Compute each partner?s gross income from the partnership for the tax year.


Paper#41285 | Written in 18-Jul-2015

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