In: Accounting
Rex loves to work with his hands and is very good at making
small figurines. Three...
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Assume that BAM correctly determined that its cost of goods
sold this year is $54,000.
- 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.
- 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.
- BAM reported depreciation expense of $8,200 for this year.
- 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).
- 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.
- 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.
- 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.)