Question

During the last five months of the year, Dwana opens a new internet telecommunications business called Dwan-Com. Dwan-Com bills $50,000 of revenues, but receives only $40,000 cash. Dwan-Com incurs $3,000 of supply expenses, and $41,000 of labor costs. Dwan-Com pays for $2,200 of the supplies and $38,000 of the labor costs in the current year.
Required:
a. Under the cash method, Dwan-Com has a net of $.b. Dwan-Com's taxable income under the accrual method is $.c. What method of accounting do you recommend that Dwan-Com elect?

Answer 1

Answer:

Under the cash method Dwan-Com has a net taxable loss of $200 as computed below.

Under the accrual method Dwan-Com has a taxable income of $6000.

The appropriate method to be chosen by Dwan-Com is a function of perception:

From a cash flow point of view,it would be advisable to choose cash method since that results in no payment of taxes now .

On other hand,when looking at tax minimization strategy, it is more preferable to choose accrual method as that method leads to lower taxes overall.

Explanation:

Cash Method                   $

Cash received                  40000

Cash paid:

Supplies                           (2200)

Labor costs                      (38000)

Net tax loss                       (200)

Accrual Method                   $

Revenue                            50,000

Expenses incurred:

Supplies                            (3000)

Labor costs                       (41000)

Taxable income                 6000