Question

4. Linkin Log opened a real estate leasing business on January 1, 2018 of the current year. During the year, the following transactions occurred and were recorded in the company's books:

1. John Link, owner, invested $225,000 cash to start the business Linkin Log.
2. John Link bought a commercial building for $125,000 on March 1, 2018. The property was comprised of building of $100,000 and land of $25,000.  The building is depreciable over a 25 year life for GAAP and a 40 year life for tax.
3. The company paid $5,000 cash to rent office space for the 2018 year.
4. The company received $36,000 in rent which represented payment under the lease on the property. The payment was for the rental period from January 1 – December 31, 2018.
5. The company paid $1,200 for a maintenance contract under which services were rendered during the year.
6. The company received $3,000 of rent which represented payment under the lease on the property. The payment was for the rental period from January 1 – January 31, 2019.
7. The company paid cash of $1,500 for utilities for 2018 bills.
8. The company paid 2018 property taxes in the amount of $10,000 on July 1, 2018 and the company also paid for 2019 property taxes in the amount of $3,500 on December 15, 2018.

9. The company paid interest expense of $3,000 on its outstanding debt during 2018.  Accrued, unpaid interest through the end of the year, December 31, 2018, was an additional $300.
10. John Link withdrew $5,000 for his personal use from the company.

Based on the information above, GAAP net income as computed using the accrual method of accounting, should be:

_____________________

Based on the information above, taxable net income as computed using the accrual method of accounting, should be:

_____________________

Based on the information above, net operating income (NOI) for GAAP as computed under the accrual method of accounting should be:

_____________________

Based on the information above, net income as computed under the cash method of accounting (i.e. not under GAAP) should be:

_____________________

Answer 1

Part 1

GAAP net income as computed using the accrual method of accounting

Particulars	Amount	Amount
Revenue		$    36,000.00
Less: Operation Expenses
Maintenance	$    1,200.00
Depreciation
($ 100,000 / 25) x (10/12) (mar to dec)	$    3,333.00
Rent	$    5,000.00
Utilities	$    1,500.00
Property Tax	$ 10,000.00
Total Operatinng Expenses		$    21,033.00
Operating Profit		$    14,967.00
Less: Non Operating Expenses
Interest		$      3,300.00
(3000 + 300)
Net Income		$    11,667.00

Part 2

Taxable net income as computed using the accrual method of accounting

Particulars	Amount	Amount
Revenue		$    36,000.00
Less: Operation Expenses
Maintenance	$    1,200.00
Depreciation
($ 100,000 / 40) x (10/12) (mar to dec)	$    2,083.00
Rent	$    5,000.00
Utilities	$    1,500.00
Property Tax	$ 10,000.00
Total Operatinng Expenses		$    19,783.00
Operating Profit		$    16,217.00
Less: Non Operating Expenses
Interest		$      3,300.00
(3000 + 300)
Net Income		$    12,917.00

Part 3

Net operating income (NOI) for GAAP as computed under the accrual method of accounting

Particulars	Amount	Amount
Revenue		$    36,000.00
Less: Operation Expenses
Maintenance	$    1,200.00
Depreciation
($ 100,000 / 25) x (10/12) (mar to dec)	$    3,333.00
Rent	$    5,000.00
Utilities	$    1,500.00
Property Tax	$ 10,000.00
Total Operatinng Expenses		$    21,033.00
Operating Profit		$    14,967.00

Part 4

Net income as computed under the cash method of accounting

Particulars	Amount	Amount
Revenue	$ 36,000.00
Advance Received	$    3,000.00
Total Cash Revenue		$    39,000.00
Less: Operation Expenses
Maintenance	$    1,200.00
Depreciation (non cash)	-
Prepaid Property Tax	$    3,500.00
Rent	$    5,000.00
Utilities	$    1,500.00
Property Tax	$ 10,000.00
Total Operatinng Expenses		$    21,200.00
Operating Profit		$    17,800.00
Less: Non Operating Expenses
Interest		$      3,000.00
(only $3000 paid in cash. $300 outstanding not taken)
Net Income		$    14,800.00