Question

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.
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 year-end of last year, BAM reported accounts receivable that had not been included in income under the accrual method of $14,900 and accounts payable that had not been deducted under the accrual method of $6,250.
b. In March, BAM sold 9,700 miniature historical figures to History R Us Inc. (HRU), a retailer of historical artifacts and figurines, for $242,500.
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 $430,056 ($22 per figurine) on October 30 of this year, to produce 543 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 543 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 447 figurines at a sci-fi convention in April. Rex accepted cash only and received $16,539 for these sales.
e. In January, BAM determined that it would not be able to collect on $4,500 of its beginning-of-the-year receivables, so it wrote off $4,500 of specific receivables. BAM sold 147,000 other figurines on credit for $323,400. 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 this year is $226,380.
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 $610 round-trip airfare, $165 for entrance to the convention, $222 for lodging, $68 for cab fare, and $164 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 $4,440.
i. BAM reported depreciation expense of $8,750 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 $19,680 ($1,640 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 $41,250 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 $12,900 contract with Advertise-With-Us (AWU) to produce a radio ad campaign. BAM paid $4,200 up front (in December of this year) and AWU agreed that BAM would owe the remaining $8,700 only if BAM’s sales increased by 15 percent over the nine-month period after the contract was signed.
m. In November of this year, BAM paid $2,700 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 $1,700 for business property taxes (based on asset values) covering the period December 1 of last year through November 30 of this year.

Required:
What amount will increase taxable income (positive) or reduce taxable income (negative) for each of the above scenario?

Answer 1

Solution:

a. $14,900 AR is $6,250

   AP = 14,900 - 6250 = $8650

∴ $8650 * 25% = 2162.5

( 25% = Positive adjustment that is added for 4 years is 25% for an year)

b. $54,800

Sale to the HRU

c. With the help of deferral method for accrual , the amount obtain is follows:

2 mos. $21 for unit  x 600 units

= $25,200

d. $17,496

Sales for Sci-fi convention

e. Will only deduct money i.e. Considered as noncollectable or else expense for schedule c

= $2100

For the accrual method given income at the time of sale

= $233100

f. Costs of goods which are sold

= $159840

g. As $610 airfare in addition with + $165 convention fee also + $222 for lodging +$68 for cab fee+ $164 for meals

= $1229

h. As the earlier payment qualifies comes under the 12-month rule and which is payment liability thus it meets the economic performance test when it pays the insurance company in august

= $5040

i. For depreciation $8450

j. Economic performance for rent expense happens for the rental period

Due to no expenditure has happened , the 12 month rule is inapplicable

Rex may only deduct rent for 11 months it was renting the property ( 11 months * $1710  )

= $18810

K. As the expended immediately = $41,250 ; $41,250 / 180 months = 229

229 * 12 = 2750 other expense for schedule c

L. As $7900 is un-deduct able due to liability which is not constant

Economic preference for the $4200 occurs as AWU provides services

Also BAM may only cut the portion of this extra credit that relates to

December ( 4200 / 12 ) = $350

M. As tax payment liabilities are economic performance and the deduction occurs BAM pay taxes

= $5100