Question

In July of this year, Stephen started a proprietorship called ECR (which stands for electric car repair).  ECR uses the cash method of accounting and Stephen has produced the following financial information for this year:

• ECR collected $81,000 in cash for repairs completed during the year and an additional $3,200 in cash for repairs that will commence after year end.  
• Customers owe ECR $14,300 for repairs completed this year, and while Stephen isn’t sure which bills will eventually be paid, he expects to collect all but about $1,900 of these revenues next year.

ECR has made the following expenditures:
     Interest expense                                                          $  1,250
     Shop rent ($1,500 per month)                                      27,000
     Utilities                                                                           1,075
     Contract labor                                                                 8,250
     Compensation                                                              21,100
     Liability insurance premiums ($350 per month)             4,200
     Term life insurance premiums ($150 per month)           1,800

          The interest paid relates to interest accrued on a $54,000 loan made to Stephen in July of this year.  Stephen used half of the loan to pay for 18 months of shop rent and the remainder he used to upgrade his personal wardrobe.  In July Stephen purchased 12 months of liability insurance to protect against liability should anyone be injured in the shop.  ECR has only one employee (the remaining workers are contract labor), and this employee thoroughly understands how to repair an electric propulsion system.  On November 1 of this year Stephen purchased a 12-month term-life policy that insures the life of this “key” employee.  Stephen paid Gecko Insurance Company $1,800, and in return Gecko promises to pay Stephen a $40,000 death benefit if this employee dies any time during the next 12 months.

Fill out a draft of the front page of Stephen’s Schedule C.  

          Required:

1) Explain the cash method.

2) Complete the front page of Stephen’s Schedule C

3) When calculations are required explain your computations.

Answer 1

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