Question & Answer

Explain the differences and similarities between personal property, real property, intangible property, and natural resources. Also, provide an example of each type of asset. 

Explain why certain long-lived assets are capitalized and recovered over time rather than immediately expensed. 

} Assume you asked your favorite AI learning tool “Please describe the all events test for recognizing taxable income.” and the AI tool responded as follows:

The all events test is a rule that determines when an item of income or expense is recognized for tax purposes. The test is based on the principle that income or expense should be reported in the period in which it is earned or incurred, rather than when it is received or paid.

For income, the all events test is met when:

• The taxpayer has a fixed right to receive the income, and

• The amount of the income can be determined with reasonable accuracy.

For example, if a taxpayer sells goods or services on credit, the income is recognized when the sale is made, not when the payment is received. The taxpayer has a fixed right to receive the income at the time of the sale, and the amount of the income can be determined with reasonable accuracy.

For expenses, the all events test is met when:

• All events have occurred that establish the fact of the liability, and

• The amount of the liability can be determined with reasonable accuracy, and

• Economic performance has occurred.

For example, if a taxpayer incurs an expense for services rendered by another person, the expense is recognized when the services are performed, not when the payment is made. The fact of the liability is established when the services are performed, the amount of the liability can be determined with reasonable accuracy, and economic performance occurs when the services are provided.

The all events test is modified by certain provisions of the Internal Revenue Code that provide special methods of accounting for certain items of income or expense. For instance, Section 451(b) provides that an accrual method taxpayer cannot defer the recognition of income beyond the period in which it is reported as revenue in an applicable financial statement or other specified financial statement. Section 451(c) provides that an accrual method taxpayer can elect to defer the recognition of certain advance payments for goods, services, or other items until the next taxable year. Section 1275 provides rules for the recognition of income or expense from certain debt instruments with original issue discount or market discount.

Is the AI answer to the question correct?  Explain.

Assume you asked your favorite AI learning tool “What accounting method choices are linked to the gross receipts test?” and the AI tool responded as follows:

Is the AI answer to the question correct?  Explain.

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 two years. For financial statement purposes, R.E.M. will recognize the income from the ticket sales when it performs the concerts, and R.E.M is obligated to return the ticket payments should a concert be cancelled. For tax purposes, R.E.M. uses the accrual method and would prefer to defer the income from the ticket sales until after the concerts are performed. This is the first time that it has sold tickets one or two years in advance. Michael Stipe, the group’s frontman, has asked your advice. Write a memo to Michael explaining your findings. 

Hank started a new business, Hank’s Donut World (HW for short) in June of last year. 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$ 252,000

Catering revenues   71,550$ 323,550

 Expenditures:

Donut supplies$ 124,240

Catering expense27,910

Salaries to shop employees52,500

Rent expense40,050

Accident insurance premiums8,400

Other business expenditures   6,850- 259,950

Net Income $  63,600

HW 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 do they 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 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.

• 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. In his estimate, Hank deducted these amounts ($40,050 in total) as rent expense.

• 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:

a) 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 using the cash method by HW last year. 

b) Determine the taxable income that HW will generate if Hank chooses to account for the business under the accrual method. 

c) Describe how your solution might change if Hank incorporated HW before he commenced business last year.

Bryan followed in his father’s footsteps and entered 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 for the current year considering the following items: 

a) 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 up front. 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. 

b) IDC finalized several other contracts this year and completed the work before year-end. The work cost $130,000 in materials, and IDC elects to immediately deduct supplies. 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.

c) IDC agreed to 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. 

d) IDC sold 100 bottles of carpet stain remover this year for $5 per bottle (it collected $500). IDC 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 IDC has elected to use the LIFO method of accounting for inventory under a perpetual inventory system:

Purchase Date Bottles Total Cost

November last year 40 $120

February this year 35 $112

July this year 25 $85

August this year 40 $140

Totals 140 $457

e) On August 1 of this year, IDC needed more room for storage and paid $900 to rent a garage for 12 months. 

f) 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 would not 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 was unable to complete the job until April 1 of next year, at which time IDC paid the remaining $1,500.

g) 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. 

h) 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.

Rex loves to work with his hands and is very good at making small figurines. Three years ago, 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, and he has provided the following information relating to his business. Calculate the business taxable income for BAM assuming that BAM elects to account for their inventory of miniatures. 

a) 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 the 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.

b) 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.

c) 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. 

d) 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.

e) 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. This year 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. 

f) Assume that BAM correctly determined that its cost of goods sold using an appropriate inventory method is $54,000 this year. 

g) 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.

h) 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.

i) BAM reported depreciation expense of $8,200 for this year.

j) 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).

k) Before he opened his doors for business, 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.

l) 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 9-month period after the contract was signed. 

m) In November of this year, BAM paid $2,500 in business property taxes (based on asset values) covering the period December 1 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.

BAM’s business income is $134,053 computed as gross income of $166,250 less deductible business expenses of $32,197 as follows:

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. Jack put his business plan together, and on January 1 of this year, Jack 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, uses the accrual method of accounting, and elects to account for inventory). 

a) In January, GJ rented a small business office about 12 miles from Jack’s home. GJ paid $10,000, which represented a damage deposit of $4,000 and rent for two years ($3,000 annually).

b) GJ earned and collected $290,000 performing geological-related services and selling its specialized digging tool [see part (i)].

c) GJ received $50 interest from municipal bonds and $2,100 interest from other investments.

d) 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.

e) GJ paid $7,000 to buy luxury season tickets for Jack’s parents for State University football games.

f) 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.

g) In an attempt to get his name and new business recognized, GJ paid $7,000 for a one-page ad in the Geologic Survey. It also paid $15,000 in radio ads to be run through the end of December.

h) GJ leased additional office space in a building downtown. GJ paid rent of $27,000 for the year.

i) 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.

j) GJ incurred a $4,000 fine from the state government for digging in an unauthorized digging zone.

k) GJ contributed $3,000 to lobbyists for their help in persuading the state government to authorize certain unauthorized digging zones.

l) On July 1, GJ paid $1,800 for an 18-month insurance policy for its business equipment. The policy covers the period July 1 of this year through December 31 of next year.

m) GJ borrowed $20,000 to help with the company’s initial funding needs. GJ used $2,000 of the 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.

n) 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.

o) GJ purchased two season tickets (20 games) to attend State University 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.

p) GJ paid $3,500 for meals when sales employees met with prospective clients.

q) 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 provided Jack’s meals while Jack was doing business, but GJ paid all expenses.

r) GJ paid a total of $10,000 of wages to employees during the year, and cost of goods sold was $15,000. 

Required:

a) What is GJ’s net business income for tax purposes for the year?

b) As a C corporation, does GJ have a required tax year? If so, what would it be?

c) If GJ were a sole proprietorship, would it have a required tax year-end? If so, what would it be?

d) If GJ were an S corporation, would it have a required tax year-end? If so, what would it be?

Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting, but he does not keep any significant inventories of the specialized assets that he sells. Joe reported the following financial information for his business activities during this year. Determine the effect of each of the following transactions on the taxable business income. 

a) 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 of this year, Joe delivers $12,000 worth of gadgets to the city that will be tested in March of next year. Joe purchased the gadgets especially for this contract and paid $8,500.

b) Joe paid $180 in July of this year to entertain 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.

c) On November 1 of this year, Joe paid $600 for premiums providing for $40,000 of “key employee” insurance on the life of Joe’s accountant over the next 12 months.

d) At the end of this year, Joe’s business reports $9,000 of accounts receivable. Based upon experience, Joe believes that at least $2,000 of his new receivables will be uncollectible. 

e) In December of this year, Joe rented equipment to complete a large job. Joe paid $3,000 in December because the rental agency required a minimum rental of three months ($1,000 per month). Joe completed the job before year-end, but he returned the equipment at the end of the lease. 

f) Joe hired a new sales representative as an employee and sent them to Dallas for a week to contact prospective out-of-state clients. Joe ended up reimbursing this employee $300 for airfare, $350 for lodging, and $250 for meals (the employee provided adequate documentation to substantiate the business purpose for the meals). Joe requires the employee to account for all expenditures to be reimbursed.

g) 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. In September of this year, 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 back and forth between the factory and his home. Joe uses the standard mileage rate to determine his auto-related business expenses.

h) Joe paid a visit to his parents in Dallas over the Christmas holidays this year. While he was in the city, Joe spent $50 to attend a half-day business symposium. Joe paid $200 for airfare, $50 for meals provided during the symposium, and $20 on cab fare to the symposium. 

Erin is considering switching her business from the cash method to the accrual method at the beginning of next year. Determine the amount and timing of her §481 adjustment for next year assuming the IRS grants Erin’s request in the following alternative scenarios.

a) At the end of this year, Erin’s business has $15,000 of accounts receivables and $18,000 of accounts payables that have not been recorded for tax purposes. 

b) At the end of this year, Erin’s business reports $25,000 of accounts receivables and $9,000 of accounts payables that have not been recorded for tax purposes. 

Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,000 of the bill by the end of this year. However, Nancy paid the remainder of the bill in the following year. 

a) How much of the $5,000 consulting services will Hank include in his income this year if he uses the cash method of accounting? What amount can Nancy deduct this year for the consulting services? 

b) How much of the $5,000 consulting services will Hank include in his income this year if he uses the accrual method of accounting? What amount can Nancy deduct this year for the consulting services?

Dustin has a contract to provide services to Dado Enterprises. In November of this year, Dustin billed Dado $10,000 for the services he rendered during the year. Dado is an accrual-method proprietorship that is owned and operated by Dustin’s father. 

a) What amount of revenue must Dustin recognize this year if Dustin uses the cash method and Dado remits payment and Dustin receives payment for the services in December of this year? What amount can Dado deduct this year?

b) What amount of revenue must Dustin recognize this year if Dustin uses the accrual method, and Dado remits payment for the services in December of this year? What amount can Dado deduct this year?

c) What amount of revenue must Dustin recognize this year if Dustin uses the cash method and Dado remits payment for the services in January of next year? What amount can Dado deduct this year?

d) What amount of revenue must Dustin recognize this year if Dustin uses the accrual method and Dado remits payment for the services in January of next year? What amount can Dado deduct this year?

This year William provided $4,200 of services to a large client on credit. Unfortunately, this client has recently encountered financial difficulties and has been unable to pay William for the services. Moreover, William does not expect to collect for his services. William has “written off” the account and would like to claim a deduction for tax purposes.  

a) What amount of deduction for bad debt expense can William claim this year if he uses the accrual method?

b) What amount of deduction for bad debt expense can William claim this year if he uses the cash method?

BCS Corporation is a calendar-year, accrual-method taxpayer. BCS was formed and started its business activities on January 1 of this year. It reported the following information for the year. Indicate BCS’s deductible amount for this year in each of the following alternative scenarios. 

a) BCS provides two-year warranties on products it sells to customers. For its current year sales, BCS estimated and accrued $200,000 in warranty expense for financial accounting purposes. During this year, BCS spent $30,000 repairing its product under the warranty. 

b) BCS accrued an expense for $50,000 for amounts it anticipated it would be required to pay under the workers’ compensation act. During the year, BCS actually paid $10,000 for workers’ compensation-related liabilities.

c) In June of this year, a display of BCS’s product located in its showroom fell and injured a customer. The customer sued BCS for $500,000. The case is scheduled to go to trial next year. BCS anticipates that it will lose the case and this year accrued a $500,000 expense on its financial statements.

d) Assume the same facts as in (c) except that BCS was required to pay $500,000 to a court-appointed escrow fund this year. If BCS loses the case next year, the money from the escrow fund will be transferred to the customer suing BCS.

e) On December 1 of this year, BCS acquired equipment from Equip Company. As part of the purchase, BCS signed a separate contract which provided that Equip would warranty the equipment for two years (starting on December 1 of this year). The extra cost of the warranty was $12,000, which BCS finally paid to Equip in January of next year.

] Rebecca is a calendar-year taxpayer who operates a business. She made the following business-related expenditures in December of this year. Indicate the amount of these payments that she may deduct this year under both the cash method of accounting and the accrual method of accounting. 

a) $2,000 for an accountant to evaluate the accounting system of Rebecca’s business. The accountant spent three weeks in January of next year working on the evaluation.

b) $2,500 for new office furniture. The furniture was delivered on January 15 of next year. 

c) $3,000 for property taxes on her factory. 

d) $1,500 for interest on a short-term bank loan relating to the period from November 1 of this year through March 31 of next year.

Adam elects the accrual method of accounting for his business. What amount of deductions does Adam recognize this year for the following transactions? 

a) Adam guarantees that he will refund the cost of any goods sold to a client if the goods fail within a year of delivery. In December of this year, Adam agreed to refund $2,400 to clients, and he expects to make payment in January of next year.

b) On December 1 of this year, Adam paid $480 for a one-year contract with CleanUP Services to clean his store. The agreement calls for services to be provided on a weekly basis.

c) Adam was billed $240 for annual personal property taxes on his delivery van. Because this was the first time Adam was billed for these taxes, he did not make payment until January of next year. However, he considers the amounts immaterial.

Travis is a professional landscaper. He provides his clients with a one-year (12-month) warranty for retaining walls he installs. In June of this year, Travis installed a wall for an important client, Sheila. In early November, Sheila informed Travis that the retaining wall had failed. To repair the wall, Travis paid $700 cash for additional stone that he delivered to Sheila’s location on November 20 of this year. Travis also offered to pay a mason $800 to repair the wall. Due to some bad weather and the mason’s work backlog, the mason agreed to begin the work by the end of January of the next year. Even though Travis expected the mason to finish the project by end of February, Travis informed the mason that he would only pay the mason the $800 when he completed the job. 

a) Assuming Travis is an accrual-method taxpayer, how much can he deduct this year from these activities?

b) Assuming Travis is a cash-method taxpayer, how much can he deduct this year from these activities?

This year Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting firm $1,500 for each instance that Elizabeth requests its assistance. The contract also provides that Elizabeth only pays the consultants if their advice increases efficiency as measured 12 months from the date of service. This year Elizabeth requested advice on three occasions, and she has not yet made any payments to the consultants. 

a) How much should Elizabeth deduct this year under this service contract if she uses the accrual method of accounting? 

b) How much should Elizabeth deduct this year under this service contract if she uses the cash method of accounting? 

] Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer. CC manufactures and sells electronic circuitry. On November 15 of this year, CC enters into a contract with Equip Corp (EC) that provides CC with exclusive use of EC’s specialized manufacturing equipment for the five-year period beginning on January 1 of next year. Pursuant to the contract, CC pays EC $100,000 on December 30 of this year. How much of this expenditure is CC allowed to deduct this year and next year? 

Matt hired Apex Services to repair his business equipment. On November 1 of this year, Matt paid $2,000 for the repairs that he expects to begin in early March of next year. 

a) What amount of the cost of the repairs can Matt deduct this year if he uses the cash method of accounting for his business?

b) What amount of the cost of the repairs can Matt deduct this year if he uses the accrual method of accounting for his business?

c) What amount of the cost of the repairs can Matt deduct this year if he uses the accrual method, and he expects the repairs to be done by early February?

d) What amount of the cost of the repairs can Matt deduct this year if he uses the cash method of accounting, and he expects the repairs to be done by early February?

On November 1 of this year, Jaxon borrowed $50,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $4,500 relating to the 12-month period from November of this year through October of next year. 

a) How much interest, if any, can Jaxon deduct this year if his business uses the cash method of accounting for tax purposes?

b) How much interest, if any, can Jaxon deduct this year if his business uses the accrual method of accounting for tax purposes?

Suppose that David has elected to account for inventories and has adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below). 

WidgetPurchase DateDirect CostOther CostsTotal Cost

#1August 15$ 2,100$ 100$ 2,200

#2October 30$ 2,200$ 150$ 2,350

#3November 10$ 2,300$ 100$ 2,400

In late December, David sold one widget, and next year David expects to purchase three more widgets at the following estimated prices:

WidgetPurchase DateEstimated Cost

#4Early spring$ 2,600

#5Summer$ 2,260

#6Fall$ 2,400

a) What cost of goods sold and ending inventory would David record if he elects to use the LIFO method this year? 

b) If David sells two more widgets next year, what will be his cost of goods sold and ending inventory next year under the LIFO method?

c) How would you answer (a) and (b) if David had initially selected the first-in, first-out (FIFO) method instead of LIFO?

d) Suppose that David initially adopted the LIFO method but wants to apply for a change to FIFO next year. What would be his §481 adjustment for this change, and in what year(s) would he make the adjustment?

This year, Amber purchased a business that processes and packages landscape mulch. Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process. 

CostsInventory

Material:Mulch and packaging$  500,000?

Administrative supplies25,000?

Salaries:Factory labor1,200,000?

Sales & advertising350,000?

Administration520,000?

Property taxes:Factory460,000?

Offices270,000?

Depreciation:Factory800,000?

Offices150,000?

a) At the end of the year, Amber’s accountant indicated that the business had processed 10 million bags of mulch, but only 1 million bags remained in the ending inventory. What is Amber’s tax basis in her ending inventory if the UNICAP rules are used to allocate indirect costs to inventory? (Assume direct costs are allocated to inventory according to the level of ending inventory. In contrast, indirect costs are first allocated by time spent and then according to level of ending inventory.)

b) Under what conditions could Amber’s business avoid having to apply UNICAP rules to allocate indirect costs to inventory for tax purposes?

Stephanie began her consulting business this year, and on April 1 Stephanie received a $9,000 payment for full payment on a three-year service contract (under the contract, Stephanie is obligated to provide advisory services for the next three years). Stephanie has elected to use the accrual method of accounting for her business. 

a) What is the minimum amount of income should Stephanie recognize for tax purposes this year if she recognizes $2,250 of income from the for financial accounting purposes? 

b) What is the minimum amount of income will Stephanie recognize next year for tax purposes?