Question

31. Arnie is a self-employed handyman. During the current year, customers pay him $10,000 in cash for his services. Arnie gives the $10,000 to his daughter, Ariel, who uses it to pay college expenses. Is Arnie or Ariel taxed on the $10,000? Explain.

33. For each of the following situations, determine the proper year for recog- nition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer:

1. Tindle Corporation purchases office supplies costing $600 on December 21,

2019. Tindle pays for the office supplies on January 18, 2020.

2. Raashan pays his employee, Sara, $22,450 in salary up to December 23, 2019. As of December 31, 2019, Raashan owes Sara $560 for the period of December 23 through December 31. The $560 is to be paid on the next pay

date, which is January 5, 2020.

3. Jerri paints Roland’s house in December 2019. Roland pays Jerri’s bill in

January 2020.

4. Devi sells Aaron a car on August 1, 2019, for $36,000. The terms of the sale call

for Aaron to pay Devi $18,000 on August 1, 2019, and $9,000 on August 1,

2020 and 2021.

5. Barnie’s Paint Barn purchases new spray painters on January 15, 2019, at a

cost of $3,000. The spray painters have an estimated useful life of 10 years, but the tax life is 5 years.

40. Postum Partnership purchases a building in 2016 for $250,000. It deducts $5,600 in depreciation on the building in 2016, $6,400 in 2017, $6,400 in 2018, and $3,200 in 2019. It sells the building in 2019 for $260,000. What is the part- nership’s gain or loss on the sale of the building?

42. LO4 George purchases stock in Dodo Corporation in 2015 at a cost of $50,000. In 2019, he sells the stock for $32,000. What is the effect of the sale of stock on George’s taxable income? Assume that George sells no other assets in 2019.

46. Determine whether the taxpayer in each of the following situations has a claim of right to the income received:

1. Trigger, Inc., receives a $5,000 stud fee for services rendered by one of its

prized horses. Under its standard contract, Trigger will return the fee if a live

foal is not born.

2. Orville works as a salesman for Brewster Company. He receives a travel allow-

ance of $1,000 at the beginning of each quarter. At the end of each quarter, he must make a full accounting of his travel expenses and reimburse Brewster for any of the $1,000 not spent on approved travel.

3. Assume that in part b, Orville is not required to account for his actual travel expenses for Brewster and is not required to return unused portions of the travel advance.
4. Arco Architecture, Inc., receives $10,000 from a client for work done by a subcontractor on the client’s project. Arco, in turn, pays $10,000 to the subcontractor.

Answer 1

Question - (31)

Answer -

Step - (1) - Facts of the Case Given -

Arnie is a self-employed handyman. During the current year, customers pay him $10000 in cash for his services. Arnie gives the $10000 to his daughter, Ariel, who uses it to pay college expenses.

.

Step - (2) - Analysis and Conclusion -

Under the assignment of income doctrine, Arnie is taxed on all income that he earns, regardless of whether he gives the cash to his daughter.

The amount he gives to his daughter are gifts which are not subject to tax. Arnie is the actual recipient of cash, that he earned.

Therefore, Arnie is taxed on the $10000 cash income.