Question

12. 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 $14,100 and accounts payable that had not been deducted under the accrual method of $9,600.

In March, BAM sold 6,450 miniature historical figures to History R Us Inc. (HRU), a retailer of historical artifacts and figurines, for $154,800.

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 $453,600 ($21 per figurine) on October 30 of this year, to produce 600 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 600 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 486 figurines at a sci-fi convention in April. Rex accepted cash only and received $17,496 for these sales.

In January, BAM determined that it would not be able to collect on $2,100 of its beginning-of-the-year receivables, so it wrote off $2,100 of specific receivables. BAM sold 111,000 other figurines on credit for $233,100. 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 $159,840.

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 $990 round-trip airfare, $102 for entrance to the convention, $279 for lodging, $96 for cab fare, and $152 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 $4,200.

BAM reported depreciation expense of $7,900 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 $20,520 ($1,710 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 $50,000 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 $12,100 contract with Advertise-With-Us (AWU) to produce a radio ad campaign. BAM paid $4,200 up front (in December of this year) and AWU agreed that BAM would owe the remaining $7,900 only if BAM’s sales increased by 15 percent over the nine-month period after the contract was signed.

In November of this year, BAM paid $5,100 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 $4,100 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.)

	Amount
a.	?
b.	?
c.	?
d.	?
e-1	?
e-2	?
F	?
G	?
H	?
I	?
J	?
K	?
l	?
m	?

Answer 1

A.As both income & expense pertain to last year & will be accounted this year and since the company has change to accrual method of accounting from the beginning of this year , both items will be presented as prior year items , below the current year operating results and thus will increase the taxable income to the extent of ($14,100 - $9,600)=$4,500 and will be taxed at applicable tax rate

B. sales revenue=$154,800

C.Sales Revenue Accrued For 1200 figurines @ 21 per unit =$25,200

D.$17,496 cash sales revenue for 486 figurines

E-1 Write off will not affect income statement if allowance for doubtful accounts is maintained

E-2 Sales Revenue=$233,100

F.COGS in income statement will reduce taxabale Income= -$159,840

G.all expenses incurred in connection with business development reduce tacabale income= -$1,619(990+102+279+96+152)

H.Insurance expenses for aug to dec will reduce taxabe Income = -$1,750($4200*5/12)

I.Depriciation is an Assets's recovery cost and hence allowed Under IFRS= -$7,900

J.11 months rent = -$18,810 ($1710 * 11 months)

K.Amortization Expense = -$3,000 ((50,000 -5,000)/180 months * 12 months))

L.Advertisement Expenses accrued only For December Month = -$350($4,200/12) . the $7,900 is due only if slaes grow by 15% is not recognized as this is a performance obligation

M.11 month Property Taxes Paid Last Year = -$3,758.33 ($4,100 * 11/12)
One month Property taxes of pre paid Taxes = -$ 425 ($5,100 * 1 /12)

Note: "-" sign indicates decrease in income