1- {Tax Forms} Ben teaches golf lessons at a country club under a business called Ben's Pure Swings (BPS). He operates this business as a sole proprietorship on the accrual basis of accounting. Ben's trusty accountant, Brian, has produced the following accounting information for BPS:
This year BPS billed clients for $86,700 and collected $61,000 in cash for golf lessons completed during the year. In addition, BPS collected an additional $14,500 in cash for lessons that will commence after year end. Ben hopes to collect about half of the outstanding billings next year but the rest will likely be written off.
Besides providing private golf lessons, BPS also contracted with the country club to staff the driving range. This year BPS billed the country club $27,200 for the service. The club paid $17,000 of the amount but disputed the remainder. By year end the dispute had not been resolved, and while Ben believes he is entitled to the money, he has still not collected the remaining $10,200.
BPS has accrued the following expenses (explained below):
Advertising (in the clubhouse) $ 13,150
Pro Golf Teachers Membership Fees 860
Supplies (golf tees, balls, etc.) 4,720
Club Rental 6,800
Malpractice Insurance 2,400
Accounting Fees 8,820
The expenditures were all paid for this calendar year with several exceptions. First, Ben initiated his golfer's malpractice insurance on June 1st of this year. The $2,400 insurance bill covers the last six months of this calendar year and the first six months of next year. At year end Ben had only paid $600, but he has assured the insurance agent he would pay the remaining $1,800 early next year. Second, the amount paid for club rental ($100 per week) represents rental charges for the last six weeks of the previous year, for the 52 weeks in this calendar year, and the first 10 weeks of next year. Ben has also mentioned that BPS only pays for supplies that are used at the club. Although BPS could buy the supplies for half the cost elsewhere, Ben likes to "throw some business" to the golf pro shop because it is operated by his brother.
Fill out a draft of the front page of a Schedule C for BPS.
2. Nicole's business uses the accrual method of accounting and accounts for inventory with specific identification. In year 0, Nicole received a $4,500 payment with an order for inventory to be delivered to the client early next year. Nicole has the inventory ready for delivery at the end of year 0 (she purchased the inventory in year 0 for $2,300).
a. When does Nicole recognize the $2,200 of gross profit ($4,500 revenue minus $2,300 cost of the inventory) if she uses the full-inclusion method?
b. When does Nicole recognize the $2,200 of gross profit from the inventory sale if she uses the deferral method?
c. How would Nicole account for the inventory-related transactions if she uses the cash method of accounting and her annual sales are usually less than $100,000?
d. How would Nicole account for the inventory-related transactions if she uses the cash method of accounting and her annual sales are usually over $2,000,000 per year?
3. This year Amber opened a factory to process and package landscape mulch. At the end of the year, Amber's accountant prepared the following schedule for allocating manufacturing costs to the mulch inventory, but her accountant is unsure of what costs need to be allocated to the inventory under UNICAP. Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process.
a. At the end of the year, Amber's accountant indicated that the business had processed 10,000 bags of mulch but only 1,000 bags remained in the ending inventory. What is Amber's tax basis in her ending inventory after applying the UNICAP rules to allocate indirect costs to inventory? (Assume direct costs are allocated to inventory according to the level of ending inventory. In contrast, indirect costs are first allocated by time spent and then according to level of ending inventory.)
b. Under what conditions could Amber's business avoid having to apply UNICAP to allocate indirect costs to inventory for tax purposes?
4. Suppose that David adopted the last-in first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).
|
Widget
|
Purchase Date
|
Direct Cost
|
Other Costs
|
Total Cost
|
|
#1
|
August 15
|
$ 2,100
|
$ 100
|
$ 2,200
|
|
#2
|
October 30
|
$ 2,200
|
$ 150
|
$ 2,350
|
|
#3
|
November 10
|
$ 2,300
|
$ 100
|
$ 2,400
|
In late December, David sold widget #2 and next year David expects to purchase three more widgets at the following estimated prices:
Widget Purchase Date Estimated Cost
#4 Early spring $ 2,600
#5 Summer $ 2,260
#6 Fall $ 2,400
a. What cost of goods sold and ending inventory would David record if he elects to use the LIFO method this year?
b. If David sells two widgets next year, what will be his cost of goods sold and ending inventory next year under the LIFO method?
c. How would you answer (a) and (b) if David had initially selected the first-in, first-out (FIFO) method instead of LIFO?
d. Suppose that David initially adopted the LIFO method, but wants to apply for a change to FIFO next year. What would be his §481 adjustment for this change, and in what year(s) would he make the adjustment?
5. On November 1 of year 0, Jaxon borrowed $50,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $4,500 relating to the 12-month period from November of year 0 through October of year 1.
a. How much interest, if any, can Jaxon deduct in year 0 if his business uses the cash method of accounting for tax purposes?
b. How much interest, if any, can Jaxon deduct in year 0 if his business uses the accrual method of accounting for tax purposes?