Question

At the beginning of 2019, Dr. John opened his medical practice as a personal service

corporation. The entity uses a December 31 year-end and the accrual method of

accounting. During the year, the corporation billed patients and insurance companies for

$485,000 for medical services. At the end of the year, $60,000 of this amount had not

been collected. The entity earned $1,500 interest on a money market account held in the

local bank and another $1,500 interest on an investment in bonds.

Dr. John’s salary from his corporation is $14,000 per month. However, he did not cash

his November and December payroll checks until January 2020. To help provide funds to

invest in the new business, Dr. John’s parents loaned him $150,000 and did not charge

him any interest. He also owns stock that has increased in value from $7,000 at the

beginning of the year to more than $30,000 at the end of the year. In 2019, Dr. John’s

wife died unexpectedly. Since Dr. John was the beneficiary of his wife’s life insurance

policy, he received a check for $200,000 from the Insurance Company on December

2019.

Although Dr. John took several accounting classes in college, he would like your help in

calculating the correct amounts of his own gross income and the gross income of the

corporation.

Would the calculations be different if the corporation used a cash method of accounting?

Answer 1

Since we are calculating gross income, receivables would be considered part of the gross income.

For Corporation, gross income:

Billed to patients and insurance companies = $485000

Interest earned on money market = $1500

Interest earned on bonds = $1500

Therefore total gross income for the Corporation = $485000+$1500+$1500 = $488000

Similarly, for Dr John, his income for Nov and Dec would be considered part of gross income (but not net income) even though he did not collect the amount.

Salary for the year = $14000 * 12 = $168000

Income from insurance (Other income) = $200,000

Loans and equity will not be considered part of income as they are financial obligations and investments respectively

Therefore total gross income for Dr John = $368,000

The calculations will be different if cash accounting is used.

For the corporation, $60,000 billed amount that is yet to be collected will not be considered part of gross income

For Dr John, salary for Nov and Dec amounting to $28,000 will not be considered part of gross income