Question

1-Losses and bad debts may include transactions that may result in losses, passive losses, casualty and theft losses etc. Transaction may result in losses due to sale or exchange of property, expropriated, seized, confiscated or condemned property, abandoned property demolition of property. You are required to explain these transactions with suitable examples.

2-Mr. James had been away from his work location for a period of 15 months and had spent some amount on his transportation, meals and lodging. The meals and lodging was not extravagant. Can you suggest the deductibility of the Travel expenses from his taxable income? Give reasons and explanations in support of your favorable or unfavorable response.

3-Mr. Calvin started his business on April 1, 2017. He earned $ 250,000 from April 1 to December 31, 2017. His taxable year is January to December. Would you suggest to annualize his income to find the tax liability? Give reasons in support of your response.

Under the Accrual Method, income is reported when it satisfies some tests. What are these test? Discuss.

           

Answer 1

ANSWER :

1. Bad Debts : Bad debt is allowable expenses. It is a business expenses deducted from Debtors.                             Example : When X co. sales goods to Amar within 30 days. but Amar fails to pay amount after 1 years.that amounts company can treat as bad debt.

Journal Entry :

P & L A/c ....................Dr                                                                           Bad debt...........................Dr.

To bad debts                                                                                                 To Debtors

(Being, Bad debt ......................)                                                               (Being, Debtors.......................)

Loss : Example, losses, passive losses, casualty and theft losses . If any losses related business is allowable expenses eg.loss due to Fire of stock is a "operating loss" . if loss due to sale property, assets as treated as "long term capital loss or short term capital loss" will be set off next year with the taxable income.

2. Any personal expendiure or Capital expediture is disallowed against business income

     In given situation James is away from work location but not specifically given whether he went for work pupose or personal purpose outside of the work location. So, there are 2 situation answer

a. James went outside of work location for the purpose of work only & he incurred meals. lodge & travelling expenses for work purpose such expenses allowed as deduction against taxable income.

b. James has gone for the personal purpose & incurred meals, lodge & travelling expenses is not allowable as deduction against taxable income.

3. Mr. calvin strated business on 1st April . He earned $ 250,000. His income should annulize except exemption slab. His earnings is taxable & tax liability arise as per Income tax slab rates & slab exemption.

4. Accrued Method : Income should be recognise in account when it is occure.

Income should account when the following tests should met :

• Income should occure : Transaction of income should occure
• There should be certainity of amount : Should know the certainity of amount
• Economic performance should occure : Events should happens