Question

Hank started a new business, Hank's Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HW's first year of operations. Hank has estimated HW's income for the first year as follows: (Do not round intermediate calculations.) $ 284,000 88,830 $ 372,830 Revenue: Donut sales Catering revenues Expenditures: Donut supplies Catering expense Salaries to shop employees Rent expense Accident insurance premiums Other business expenditures Net Income $ 144, 400 36,070 60,500 46,930 8,784 8, 770305, 454 $ 67,376 HW operates as a sole proprietorship and Hank reports on a calendar year. Hank uses the cash method of accounting and plans to do the same with HW (HW has no inventory of donuts because unsold donuts are not salable). HW does not purchase donut supplies on credit nor does it generally make sales on credit. Hank has provided the following details for specific first-year transactions. 1. A small minority of HW clients complained about the catering service. To mitigate these complaints, Hank's policy is to refund dissatisfied clients 50 percent of the catering fee. By the end of the first year, only two HW clients had complained but had not yet

please help thanks!

Answer 1

Part A

HW’s results should be reported on a Schedule C filed with Hawk’s personal tax return. The tax is due on 15^th day of April.

	Balance	Adjust	Correct
Revenue:
Donut sales	284000		284000
Catering revenues	88830	2500	98560
		7230
Total Revenue	372830		382560
Expenditures:
Donut supplies	144400		144400
Catering expense	36070	(9890)	26180
Salaries to shop employees	60500		60500
Rent expense	46930	(2320)	19280
		(25330)
Accident insurance premiums	8784	(6954)	1830
Other business expenditures	8770	(410)	2460
		(5900)
Total Expenses	305454		254650
Net Income	67376		127910

Adjustments under the cash method

a. refunds cannot be deducted from revenue until paid = 2500

b. prepaid income is recognized in the period received = 7230

c. a fine is non-deductible = 410

d. only 5 months are deductible 8784-(8784 x 5/24) = 6954

e. deposits are not deductible = 2,320

deduct 7 months of equipment lease 35760-(1490*7) = 25330

f. last month cater expense unpaid at year end = 9,890

g. key person insurance premium is not deductible = 5,900

h. no change under the cash method

Part B

	Balance	Adjust	Correct
Revenue:
Donut sales	284000		284000
Catering revenues	88830	2500	99631
		241
		8060
Total Revenue	372830		383631
Expenditures:
Donut supplies	144400		144400
Catering expense	36070		36070
Salaries to shop employees	60500		60500
Rent expense	46930	(2320)	16625
		(2655)
		(25330)
Accident insurance premiums	8784	(6954)	1830
Other business expenditures	8770	(410)	2460
		(5900)
Total Expenses	305454		261885
Net Income	67376		121746

Adjustments under the accrual method

a. refunds are a payment liability so no deduction = 2500

b. prepaid income ($7230/30*1) is deferred one year = 241

c. a fine is non-deductible = 410

d. only 5 months are deductible 8784-(8784 x 5/24) = 6954

e. deposits are not deductible = 2,320

Deduct 7 months of shop lease 8,850-(885x7) = 2655

deduct 7 months of equipment lease 35760-(1490*7) = 25330

f. catering expense is accrued properly

g. key person insurance premium is not deductible = 5,900

h. no change under the cash method = 8060

Therefore,

a.	The tax return is due by	15th day of April
	Taxable income	$127910
b.	Taxable income	$121746