Question

are provided with the unadjusted trial balance (Microsoft® Excel) and your manager’s meeting notes and questions (Microsoft® Word) for your new tax client – Phoenix Medical. 2. Following the notes, modify the unadjusted trial balance to generate a trial balance workpaper (in Microsoft® Excel) that includes: a. Adjusting Journal Entries b. Adjusted Book Income c. Tax Journal Entries d. Taxable Income e. Answers to your manager’s questions (Microsoft® Word or Excel). 3. The client depends on you, the CPA, to provide journal entries for activity in fixed assets. While discussing fixed assets, the client divulges that he got a great deal to upgrade his laser dermatology equipment. Ultimately, you find out that $569,888 of new equipment was purchased and placed in service on 6/18/2015. 4. Furthermore, and much after the fact, you discover that old medical equipment was sold to an unrelated party for $75,000 cash. The original cost of the equipment was $300,000 and it was fully depreciated (no Sec. 179). The cash was deposited in one of the shareholders personal accounts. a. Provide a journal entry to calculate the gain on sale and adjust the fixed asset and accumulated depreciation accounts. b. What is the nature of this gain? The nature of this gain is going to be long term since it is over more than one year. c. Could the Dr. have structured this sale in a different way to avoid taxable income? How? Yes only if the equiptment was gifted to a spouce then there would not have been any income tax. 5. The client depends on his accountant to provide a journal entry for the annual depreciation expense. They have adopted a policy of treating book depreciation equal to tax depreciation. Depreciation expense for the year will include: a. Depreciation on assets placed in service prior to 2015 is: $86,769 b. Maximize Sec. 179 expense on assets placed in service in 2015. c. Take Sec. 168(k) – 50% Bonus – on new equipment if applicable.

Week 3 Determine Taxable Income: 1. Determine taxable income. Show all adjustments in the Microsoft® Excel spreadsheet. Footnote references are provided to assist you. 2. The Dr. has filed his prior tax returns on the cash basis. a. What questions will you ask to be sure he can continue to file on the cash basis? 3. You find that in 2015, the Dr. qualifies, and choose to file on the cash basis. His books are kept on the accrual basis. Determine the adjustments needed. 4. No federal taxes were paid in 2014, and no estimated taxes were paid in 2015. 5. Within the state tax expense, you find $4,389 is late payment penalties. 6. While analyzing the financial information, you find that hidden in “Accounts Payable” is $28,953 of accrued salaries. You also find that the salaries were paid in the first week of February. a. Does this have an impact on taxable income? 7. Determine the accrual to cash adjustments for accounts receivable and accounts payable. a. A charitable contribution carryforward of $40,000 is available. b. Included in insurance expense is $12,523 of officers’ life insurance. You determine the company is the beneficiary, and each officer is a greater than 20% shareholder

Answer 1

A) Journal Entry

Detail	Particular	Debit ($)	Credit ($)
Sale of Equipment	Cash     A/c       Dr. To Equipment A/c (Note 1)        To Gain on Sale of equipment	75000	- 75000

(Note 1):- Equipment is fully depreciated, thus the book value of the equipment at the time of sale of equipment will be NIL. Thus, complete $ 75000 received as Cash at the time of sale of equipment is treated as gain on sale of equipment.

B) Gain on sales of equipment is of Short-term capital gain in nature.

Book Depreciation: The book depreciation expense is the amount recorded in the "book" and reported in the financial statement. This depreciations is based on the matching principle of accounting. For example, we have been using straight line method or reducing balance method to calculate depreciation as shown in the Book of accounts is known as Book Depreciation.

Tax Depreciation: The tax depreciation is recorded on the company income tax returns and will be based on the Internal Revenue Service's (IRS) rules. The IRS might specify that the machines is a 7-year machines regardless of a company's situation. The IRS rules also allow a company to accelerate the depreciation expense.

Accelerated depreciation means taking more depreciation in the first few years and less depreciation in the later years of the machine's life. This saves income tax payments in the first few years of the asset's life but will result in more taxes in the later years. Companies that are profitable will find the accelerated depreciation to be attractives.

The Journal Entry for the equipments placed in service prior to 2014:

Particular	Debit Amount	Credit Amount
Depreciation Expense	86,769
To Accumulated Depreciation Account		86,769

The Journal Entry to record sec. 179:

Particular	Debit Amount	Credit Amount
Depreciation Expense	62,400
To Accumulated Depreciation Account		62,400

The Journal Entry for the equipments placed in service in 2014:

Particluar	Debit Amount	Credit Amount
Depreciation Expense	31,200
To Accumulated Depreciation		31,200

Assuming the items purchased in 2014 & brought to service in 2014, will have Sec. 179 applicable & as per sec. 168(k) Bonus applicable, we can claim exemption for 50% of the depreciation expense for the machinery installed in the year 2014 & so, if the depreciation expense for the year is $ 62,400 then with 50% Bonus, we need to book Tax depreciation as only 50% of it i.e. $ 31,200.