Question

2. Determine the amount of gross income the taxpayer must report in each of the 101 I 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. b. 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. c. 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

Part A

Amount included in Gross income = $3000

The Tax Benefit Rule states that if any deduction that is recovered in the subsequent period is to be included in the income of the year in which it is recovered and to the extent of benefits received. Being the amount of overbilling deducted in previous year, the amount is included in income in the year its repayment is received. According to the accounting period concept, it is not possible to restate or amend the prior period’s deduction by going back.

Part B

Amount included in Gross income = $1000

There is not legislation that allows the cash treasure troves exclusion.

Part C

Amount included in Gross income = $800 (first month’s rent $400 + last month’s rent $400)

According to wherewithal-to-pay concept, the prepaid income is to be recognized. The amount for cleaning deposit is included in the gross income as it is not to be claimed.

Part D

Amount included in Gross income = $0

The purchase is not treated as bargain purchase. The less price offered is accepted because the proportion of computer selling is very low.

Part E

Amount included in Gross income = $120

The Tax Benefit Rule states that if any deduction that is recovered in the subsequent period is to be included in the income of the year in which it is recovered and to the extent of benefits received. Being the amount of overbilling deducted in previous year, the amount is included in income in the year its repayment is received. According to the accounting period concept, it is not possible to restate or amend the prior period’s deduction by going back.