In: Accounting
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)
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.