In: Accounting
Hank started a new business, Hank’s Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HW’s first year of operations. Hank has estimated HW’s income for the first year as follows: (Do not round intermediate calculations.)
Revenue: | |||||
Donut sales | $ | 286,000 | |||
Catering revenues | 89,910 | $ | 375,910 | ||
Expenditures: | |||||
Donut supplies | $ | 145,660 | |||
Catering expense | 36,580 | ||||
Salaries to shop employees | 61,000 | ||||
Rent expense | 47,360 | ||||
Accident insurance premiums | 8,808 | ||||
Other business expenditures | 8,890 | - | 308,298 | ||
Net Income | $ | 67,612 | |||
HW operates as a sole proprietorship and Hank reports on a calendar year. Hank uses the cash method of accounting and plans to do the same with HW (HW has no inventory of donuts because unsold donuts are not salable). HW does not purchase donut supplies on credit nor does it generally make sales on credit. Hank has provided the following details for specific first-year transactions.
Required:
Hank started a new business, Hank’s Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HW’s first year of operations. Hank has estimated HW’s income for the first year as follows: (Do not round intermediate calculations.)
Revenue:
Donut sales $ 286,000
Catering revenues 89,910 $ 375,910
Expenditures:
Donut supplies $ 145,660
Catering expense 36,580
Salaries to shop employees 61,000
Rent expense 47,360
Accident insurance premiums 8,808
Other business expenditures 8,890 - 308,298
Net Income $ 67,612
HW operates as a sole proprietorship and Hank reports on a calendar year. Hank uses the cash method of accounting and plans to do the same with HW (HW has no inventory of donuts because unsold donuts are not salable). HW does not purchase donut supplies on credit nor does it generally make sales on credit. Hank has provided the following details for specific first-year transactions.
A small minority of HW clients complained about the catering service. To mitigate these complaints, Hank’s policy is to refund dissatisfied clients 50 percent of the catering fee. By the end of the first year, only two HW clients had complained but had not yet been paid refunds. The expected refunds amount to $2,550, and Hank reduced the reported catering fees for the first year to reflect the expected refund.
In the first year, HW received a $7,260 payment from a client for catering