Question

2. Determine the amount of gross income the taxpayer must report in each of the following situations. Explain why the amount is taxable and how you determined the taxable amount. a. National Corporation receives a $12,000 bill for legal fees from its attorney in December. National paid the bill promptly and deducted the $12,000 as a legal expense for its year ending December 31. During the audit of its financial statements, the auditor determines that the attorney had double billed the corporation for $3,000 of expenses. National sent a copy of the auditor's findings in March. The attorney agrees with the auditor and sends National a check for $3,000 in April. Greta spends a week in Las Vegas. While cashing in some of her chips at the cashier's window, she looks down and sees a $1,000 bill lying crumpled on the floor. She picks up the bill and puts it in her pocket. Akron Living, Inc., an accrual basis corporation, owns an apartment building. On November 1, it rents an apartment for $400 per month. Per the terms of the rental agreement, the tenant pays the corporation $1,100 on November. The $1,100 consists of the first and last months' rent and a $300 cleaning deposit. The cleaning deposit will be used at the end of the lease and any amount not used for cleaning will be returned to the tenant. Very little is usually returned. d. Anthony is an employee of Channel Company. Channel Company institutes a computer upgrade and offers its old computers for sale for $700. Anthony offers Channel $500 for one of the computers. Because they have not been selling well, Channel accepts Anthony's offer and sells him a computer for $500. e. James owns Argyle Co. as a sole proprietorship. In November, James pays a $600 bill for supplies and deducts it on his tax return. The following February, the supplier sends James a check for $120. A letter accompanying the check indicated that the supplier had overcharged Argyle Co. and the check was to adjust for the overcharge.

Answer 1

Determination of gross income as per the given information:
a. National Corporation claims $12000 as professional charges and expenses
for legal fees at the year ending December 31. In that amount the amount of
expenses of $ 3000 is included twice which needs to be reversed by National
Corporation in the subsequent year. So in the next the amount of $ 3000 shown as
Income
b. Greta claimed $1000 bill amount as expense which is not actual expense spend
by Greta to claim. That bill belongs to some other person not Greta. If Greta claimed
that bill as deduction while arriving taxable income then the amount of $ 1000 is taxable
in next years because that bill is with other's name not Greta's name which is not
allowable expenditure.
C. Akron Living Inc., $ 400 of first month rent only to be taken as income because
out of the balance amount $ 400 is relates to the last month when the tenant vacate the
possession, so that income is taxable at that point of time and cleaning deposit is like
if used for the purpose for which received that is reimbursement of expenditure if not
refund that amount. So that amount is not taxable
d. The taxable income for Channel company is $ 500 because for that amount only
the computers sale done and though offer price is $ 700 there is no demand for that.
So, taxable income is $500
e. The amount of $120 is taxbale in the year in which he got the check for overcharging
the expense because the amount of $600 taken as deduction in the previous years.