Question

Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting but he doesn’t keep any significant inventories of the specialized assets that he sells. Joe reported the following financial information for his business activities during year 0. Determine the effect of each of the following transactions on the taxable business income. Required: Joe has signed a contract to sell gadgets to the city. The contract provides that sales of gadgets are dependent upon a test sample of gadgets operating successfully. In December, Joe delivers $12,950 worth of gadgets to the city that will be tested in March. Joe purchased the gadgets especially for this contract and paid $9,250. Joe paid $255 for entertaining a visiting out-of-town client. The client didn’t discuss business with Joe during this visit, but Joe wants to maintain good relations to encourage additional business next year. On November 1, Joe paid $550 for premiums providing for $55,000 of “key man” insurance on the life of Joe’s accountant over the next 12 months. At the end of year 0, Joe’s business reports $11,250 of accounts receivable. Based upon past experience, Joe believes that at least $2,450 of his new receivables will be uncollectible. In December of year 0, Joe rented equipment to complete a large job. Joe paid $5,250 in December because the rental agency required a minimum rental of three months ($1,750 per month). Joe completed the job before year-end, but he returned the equipment at the end of the lease. Joe hired a new sales representative as an employee and sent her to Dallas for a week to contact prospective out-of-state clients. Joe ended up reimbursing his employee $450 for airfare, $500 for lodging, and $400 for meals (Joe provided adequate documentation to substantiate the business purpose for the meals). Joe requires the employee to account for all expenditures in order to be reimbursed. Joe uses his BMW (a personal auto) to travel to and from his residence to his factory. However, he switches to a business vehicle if he needs to travel after he reaches the factory. Last month, the business vehicle broke down and he was forced to use the BMW both to travel to and from the factory and to visit work sites. He drove 195 miles visiting work sites and 76 miles driving to and from the factory from his home. Joe uses the standard mileage rate to determine his auto-related business expenses. Joe paid a visit to his parents in Dallas over the Christmas holidays. While he was in the city, Joe spent $125 to attend a half-day business symposium. Joe paid $350 for airfare, $110 for meals during the symposium, and $65 on cab fare to the symposium.

Answer 1