Question

1. Jack, a geologist, opened a business organized as a C corporation called Geo-Jack (GJ) in January of this year. Jack is the sole shareholder. Assume GJ reports on a calendar year and uses the accrual method of accounting. For each item below, indicate its effect on Jack’s taxable income and you must clearly indicate whether it is positive or negative.
   1. In January, GJ rented a small business office about 12 miles from Jack’s home. GJ paid $14,000, which represented a damage deposit of $6,000 plus rent for two years ($4,000 annually).

______________

2. GJ earned and collected $300,000 performing geological-related services and selling its specialized digging tool.

______________

3. GJ purchased some new equipment in February for $53,700. It claimed depreciation on these assets during the year in the amount of $4,510.

______________

4. GJ paid Jack’s father $12,000 for services that would have cost no more than $7,000 if Jack had hired any other local business to perform the services. While Jack’s dad was competent, he does not command such a premium from his other clients.

Answer 1

the following are the effects of the transactions on the taxable income of Jack:

1. -$10,000 in the current year and the rest -$4,000 in the next subsequent year. this is so because under accrual basis of accouting all income and expenses pertaining the following is only taken. the damage deposit of $6000 and rrent of $4000 pertains to his year and the rent of $4000 belongs to the next financial year hence wil not be considered his year.

2. +$300,000. this transaction clearly states the income of Jack in the current financial year which will directly be added to his taxable income.

3. -$4510. only the amount of depreciation will be deducted from his taxable income. new equipment purchased is an asset and hence have no impact on the taxable income.

4. -$12000. the whole amount of $12000 will be deducted from the taxable income irrespective of the fact whether the services so recieved is worth the amount or not