Question

At the beginning of 2017, 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 $12,000 per month. However, he did not cash his November and December payroll check until January 2018. 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.

Dr. John would like your help in calculating the correct amounts of his own gross income and the gross income of the corporation.

Please show all work.

Answer 1

Calculation of gross income of the corporation

Amount billed for medical services                        $485,000

Interest on money market                                         $1,500

Interest on investment                                              $1,500

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Total Gross income                                             $488,000                     

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Note: Since accrual method of accounting is followed $ 60,000 will be considered to be income of the year 2017 even though it had not been collected

Calculation of gross income of Dr. John

Salary Income(12000*12)                                   $ 144,000

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Note: Increase in value of stock will not be considered until the same has actually been realised.i.e notional gains will be ignored