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In: Accounting

Matt operates a business that designs specialized items for clients, among other activities. Matt uses the...

Matt operates a business that designs specialized items for clients, among other activities. Matt uses the accrual method of accounting

but he doesn’t keep any significant inventories of the items that he sells. Matt reported the following financial information for his

business activities during the year. For each of the following items determine the effect on the taxable business income.

Item

A

Matt paid a visit to his parents in San Antonio over the Christmas holidays. While he was in the

city, Matt spent $350 to attend a half-day business symposium. Matt paid $700 for airfare, $90

for meals during the symposium, and $80 on cab fare to the symposium.

B

Matt has signed a contract to develop and sell gadgets to the city. The contract provides that sales

of gadgets are dependent upon a test sample of gadgets operating successfully. In December,

Matt delivers $35,000 worth of gadgets to the city that will be tested in March. Matt developed

the gadgets especially for this contract and paid $35,500.

C

Matt paid $480 for meals with a visiting out-of-town client. The client didn’t discuss business

with Matt during this visit, but Matt wants to maintain good relations to encourage additional

business next year.

D

At the end of the year, Matt’s business reports $16,000 of accounts receivable. Based upon past

experience, Matt believes that at least $4,000 of his new receivables will be uncollectible.

E

In December of this year, Matt rented equipment to complete a special job. Matt paid $8,000 in

December because the rental agency required a minimum rental of four months ($2,000 per

month). Matt completed the job before year-end, but he returned the equipment at the end of the

four-month lease.

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