Question

Richard Ross operates a flower shop downtown. Ross appears to be living beyond his means and is under investigation for tax fraud. 1. You have a financial statement signed by Ross and dated December 31, 20X1. The statement indicates Ross had $1,000 cash on hand. Cash on hand was zero at year end 20X2 and 20X3. 2. Ross has a checking with a balance of $4,000 on December 31, 20X1. His balance on December 31, 20X2, was $9,000, and on December 31, 20X3, was $2,000. 3. A search of the county real estate records shows that Ross purchased his home in 20X1 for $130,000 and that he obtained a mortgage on the house at that time. The mortgage balances are $98,000, $96,500, and $94,500 at year end 20X1, 20X2, and 20X3, respectively. The monthly mortgage payments are $1,000. Any amount that did not reduce the mortgage balance is interest expense. 4. Real estate taxes on the house are $1,500 per year. 5. Ross bought a new car in April 20X2. He paid $25,000 cash for the car. 6. City records show that Ross obtained a building permit for backyard swimming pool. The pool company indicated that Ross the pool project cost $20,000 and was completed in June 20X2. Ross made a $10,000 cash down payment and received an interest free loan from the pool company for the remaining $10,000. Ross made payments of $500 per month beginning in July 20X2. The loan balance was $7,000 on December 31, 20X2, and $1,000 on December 31, 20X3. 7. A disgruntled former employee told you that Ross has maintained a $1,500 a month apartment for his girlfriend since 20X0. You were able to corroborate this information. 8. You determine that Ross purchased a Rolex watch for $25,100 in February 20X2. In December 20X3, he spent $15,900 on various items for his girlfriend at Jimmy Choo. 9. His girlfriend told you that Ross has paid her monthly car payment of $300 since 20X1. 10. Ross purchased a boat in June 20X3 for $84,000. 11. Ross and his girlfriend took a vacation in 20X3 that cost $12,000. 12. The Ross Flower Shop had a net profit of $40,000 in 20X2, and $45,000 in 20X3. Prepare a net worth analysis for Richard Ross to determine whether he has income from unknown sources in 20X2 and 20X3.

Answer 1

		20X2	20X3
Income		40000	45000
Taxes on real Estate		1500	1500
Interest Expense on Mortgage Value		10500	10000
Insallment for pool		3000	6000
Monthly rental for girlfriend		18000	18000
Expenses on girlfriend			15900
Monthly Car installment for girlfriend		3600	3600
Vacation			12000
Net Balance After expenses		3400	-22000

	20x2	20x3
Home	130000	130000
Cash	0	0
Bank	9000	2000
Cash for Car	25000	25000
Rolex	25100	25100
Pool	10000	10000
Boat		84000
Total Assets	199100	276100
Loan on Pool	7000	1000
Mortgage	96500	94500
Profit Transferred	3400	-22000
Total Liabalities	106900	73500

Clearly the huge gap in its total assets and total liabilities over the period of 2 years clearly shows that he had income from other sources to an minimum extent of (199100-106900)= 92200 in 20X2

and (276100-73500)= 202600 in 20X3.

If he is not having Income from any other source then there might be a loan available to him to the extent shown above.