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 the end of last year, BAM reported accounts receivable that had not been included in income under the accrual method of $14,000 and accounts payable that had not been deducted under the accrual method of $5,000. b. In March, BAM sold 5,000 miniature historical figures to History R Us Inc. (HRU), a retailer of historical artifacts and figurines, for $75,000. 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 it for the next three years. HRU paid BAM $216,000 ($12 per figurine) on October 30 of this year, to produce 500 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 500 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 400 figurines at a sci-fi convention in April. Rex accepted cash only and received $11,000 for these sales. e. In January, BAM determined that it would not be able to collect on $2,000 of its beginning-of-the-year receivables, so it wrote off $2,000 of specific receivables. BAM sold 100,000 other figurines on credit for $120,000. 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 $54,000. 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 $350 round-trip airfare, $100 for entrance to the convention, $210 for lodging, $65 for cab fare, and $110 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 $3,600. 1. BAM reported depreciation expense of $8.200 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 $14,400 ($1,200 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 $30,000 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. I. In December, BAM agreed to a 12-month, $8,000 contract with Advertise-With-Us (AWU) to produce a radio ad campaign. BAM paid $3,000 up front (in December of this year) and AWU agreed that BAM would owe the remaining $5,000 only if BAM's sales increased by 15 percent over the 9-month period after the contract was signed. m. In November of this year, BAM paid $2,500 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 $1,500 for business property taxes (based on asset values) covering the period December 1 of last year through November 30 of this year. What amount will increase taxable income (positive) or reduce taxable income (negative) for each of the above scenario? (Enter the write-off of the receivable under e-1 and the sales under e-2. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

Answer 1

Rex BAM's business income is $134,053 computed as gross income of $166,250 less deductible business expenses of $32,1977 as follows: Sr.No. Description b. Sale to HRU Accrual Explanation 75000 c. d. Prepayment of goods from HRU Sale at sci-fi convention e. Sale of figurines on credit Cost of goods sold Gross Profit a. 481 adjustment cash to accrual method Gross Income e. and a. Bad Debt Expense g. Travel costs Using the deferral method for accrual, only amount earned is 12000 recognized (2 mos. * $12 per unit x 500 units). 11000 Under the accrual method included income at time of sale Note: Gross receipts for schedule Cis $413,654 [(b) + (c) + (d) + 120000 (e)] -54000 164000 14,000 AR-5,000 AP = 9,000; 9,000 x 25% = $2,250.00 A positive 2250 adjustment is included over 4 years (25% a year). 166250 2000 Can only deduct amounts actually written off as uncollectible. $350 airfare +$100 convention fee + $210 lodging + $65 cab fare 780 + $55 meals (1/2 of $110) This prepayment qualifies under the 12-month rule and it is a payment liability so it meets the economic performance test 3600 when it pays to the insurance company in August. 8200 Economic performance for rent expense occurs over the rental period. Because no expenditure is accrued, the 12 month rule is inapplicable. Rex may only deduct rent for 11 months it was 13200 renting the property (11 mos. x $1,200). 30,000 -5,000 expensed immediately = 25,000; 25,000/180 mos. 1667 = 138.89; 138.89 x 12 mos. = $1,667 $3,000 is not deductible because the liability is not fixed. Economic performance for the $3,000 occurs as AWU provides services. Thus, BAM may only deduct the portion of this 250 expense that relates to December (3,000 1/12) Taxes are payment liabilities so economic performance and the 2500 deduction occurs when BAM pays the taxes. 32197 134053 Schedule Cincome h. i. Insurance expense Depreciation j. Rent expense k. Amortization-start-up costs 1. Advertising m. Property taxes Total Deductions Business income