Question - XYZ Manufacturing, Inc., located in Centervale, uses the calendar year and the cash method of accounting.
On December 31, 2010, XYZ made the following cash payments:
- $100,000 for a two-year office lease beginning on February 1, 2011
- $58,000 of inventory items held for sale to customers
- $21,800 to purchase new manufacturing equipment, which was delivered and set up on January 15, 2011
- $10,000 compensation to the company's auditors who spent three weeks in January 2011 analyzing XYZ's internal control system, as a part of the annual audit
- $30,500 property tax paid to the local government for the first six months of 2011
Respond to the following:
- To what extent can XYZ deduct these payments in 2010? Explain your answer citing relevant rules and laws.
- What advantages does the cash method of accounting offer to the company? Give reasons for your answer.
- Would any other method offer an advantage? Give reasons for your answer.