Question

Duck, an accrual basis corporation, sponsored a rock concert on December 29, 2020. Gross receipts were $300,000. The following expenses were incurred and paid as indicated:
Expense Payment Date
Rental of coliseum $25,000 December 21, 2020
Cost of goods sold:
Food 30,000 December 30, 2020
Souvenirs 60,000 December 30, 2020
Performers 100,000 January 5, 2021
Cleaning the coliseum $10,000 February 1, 2021
Performers Cleaning the coliseum 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, 2020. a. Calculate Duck's net income from the concert for tax purposes for 2019. If an amount is zero, enter "0".
Gross receipts 300,000 ✓
Coliseum rental 25,000
Food 30,000
Souvenirs 60,000
Performers 100,000
a. Calculate Duck's net income from the concert for tax purposes for 2019. If an amount is zero, enter "0". Gross receipts 300,000 Less: Coliseum rental 25,000 Food 30,000 Souvenirs 60,000 Performers 100,000 Cleaning costs Total expenses 215,000 Net income for 2019 85,000
b. What is the true cost to Duck if it had to defer the $100,000 deduction for the performers until 2020? Assume a 5% discount rate and a 21% marginal tax rate in 2019 and 2020. The present value factor for a single sum at 5% for one year is 0.9524. If required, round your answers to the nearest dollar. The present value of the 2020 tax savings is and the cost of the deferral to Duckiss.

Answer 1

Answer:

Duck Corporation

Rock Concert

a) Income Statement for the year ended December 31, 2020:

Gross receipts          $300,000

Less: Coliseum rental  25,000

Food                             30,000

Souvenirs                     60,000

Performers                 100,000

Total expenses          215,000

Net income for 2019  85,000

b) The true cost is $116,240.

Explanation:

a) Data and Calculations:

Rental of coliseum $25,000 December 21, 2020

Cost of goods sold:

Food 30,000 December 30, 2020

Souvenirs 60,000 December 30, 2020

Performers 100,000 January 5, 2021

Cleaning the coliseum $10,000

b) The Cleaning expense is excluded because the services had not been rendered as at December 31.  The inclusion of the Performers' compensation is necessary because the services had been enjoyed and incurred as at December 31.

c)  The true cost = the Present value of the $100,000 performers' compensation plus additional tax expense of $21,000 ($100,000 * 21%) that would have been deducted.

= $116,240 ($95,240 + $21,000)