Question

Firm B, a calendar year, cash basis taxpayer, leases lawn and garden equipment. During December, it received the following cash payments. To what extent does each payment represent current taxable income to Firm B?
a. $522 repayment of a loan from an employee. Firm B loaned $500 to the employee six months ago, and the employee repaid the loan with interest.

b. $600 deposit from a customer who rented mechanical equipment. Firm B must return the entire deposit when the customer returns the undamaged equipment.

c. $10,000 short-term loan from a local bank. Firm B gave the bank a written note to repay the loan in one year at 9 percent interest.

d. $888 prepaid rent from the customer described in part b. The rent is $12 per day for the 74-day period from December 17 through February 28.

Answer 1

Answer:

a. $522 repayment of a loan from an employee. Firm B loaned $500 to the employee six months ago, and the employee repaid the loan with interest.

• Firm B should recognize $22 as interest income.

b. $600 deposit from a customer who rented mechanical equipment. Firm B must return the entire deposit when the customer returns the undamaged equipment.

• The deposit cannot be recognized as income since it is a liability.

c. $10,000 short-term loan from a local bank. Firm B gave the bank a written note to repay the loan in one year at 9 percent interest.

• Interests ($900) will be recognized when they are actually paid for in 1 year. No accrued interests must be reported on the balance sheet (December 31).

d. $888 prepaid rent from the customer described in part b. The rent is $12 per day for the 74-day period from December 17 through February 28.

• The $888 will be recognized as revenue during the current year.

Explanation:

When a taxpayer is a cash basis taxpayer, it will only report income and expenses that are actually collected or paid for respectively. All accounts receivable or accounts payable are not considered revenues nor expenses.