You've been asked to collect information on Dewey Cheatum to see if he is not reporting...

You've been asked to collect information on Dewey Cheatum to see if he is not reporting all his income, use the Net Worth method to determine whether you think Dewey is not being withholding income Information Gathered about Dewey Cheatum Beginning 2019 During 2019 Ending 2019 Cash In Banks 20,000 60,000 Marketable Securities 70,000 120,000 Resdence 400,000 400,000 Mortgage on Residence 190,000 180,000 Automobile 45,000 45,000 Auto Loan 37,000 35,000 Salary 120,000 Gift from Mother 1,000 Gain on Security Transactions 18,000 Living Expenses and Other Expenditures 82,000 Applying the above amounts and the Net Worth Method: (a) Determine the amount of potential unreported income (b) List what other information or clarifications you may need to solidify your answer for (a)

Expert Solution

a.

Particulars	op 2019	cl 2019	During 2019
Assets
cash	20000	60000	40000
securities	70000	120000	50000
residence	400000	400000	0
Automobile	45000	45000	0
Total Assets - (A)	535000	625000	90000

Liabilities
Mortage	190000	180000	10000
Automobile	37000	35000	2000
Total Liabilities - (B)	227000	215000	12000


Net Worth C = (A - B)	308000	410000	102000

Income
Salary			120000
Gift			1000
Gain on Securities			18000
Total Income - (i)			139000

Expenditure
Living & Other Expenditure			82000
Total Expenditure - (ii)			82000

Net Income iii = (i - ii)			57000

Unreported Income - (C - iii)			45000

b.

1. It is assumed that Marketable Securities to the extent of 50,000 during 2019 have been invested by him.

2. We need more clarity on the total expenditure of 82,000 to identify whether the repayment of 2 loans (10,000 + 2,000) made out of his Net Income/Savings of 57,000.

ekkarill92 answered 2 years ago

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