Question

Duck, an accrual basis corporation, sponsored a rock concert on December 29, 2018. Gross receipts were $300,000. The following expenses were incurred and paid as indicated: Expense Payment Date Rental of coliseum $25,000 December 21, 2018 Cost of goods sold: Food 30,000 December 30, 2018 Souvenirs 60,000 December 30, 2018 Performers 100,000 January 5, 2019 Cleaning the coliseum $10,000 February 1, 2019 Because the coliseum was not scheduled to be used again until January 15, the company with which Duck had contracted did not perform the cleanup until January 8–10, 2019. a. Calculate Duck's net income from the concert for tax purposes for 2018. If an amount is zero, enter "0".

Answer 1

Answer:

$85,000

Explanation:

First, we can organize the expenses information like this:

Expense                           Payment        Date

Rental of Coliseum         $25,000         12-21-2018

Cost of goods sold         $90,000         12-30-2018

Performers                      $100,000        1-05-2019

Cleaning the coliseum   $10,000          2-01-2019

Because in accrual basis of accounting, expenses are recognized when they are incurred, we then take the gross recepits, and substract from it all the expenses that were incurred in the year 2018.

That is to say, we substract all expenses except the cleaning the coliseum expense, because this expense was incurred in 2019, and was paid in 2019, therefore, it is not part of the taxable income for 2018 under the accrual basis of accounting.

Same is true for the performers expense. It was paid in 2019, but it was incurred in 2018, therefore, it has to be substracted to obtain the 2018 taxable income.

Taxable income = Gross receipts - Expenses incurred in 2018

                           = $300,000 - $215,0000

                           = $85,000