Question

Rex loves to work with his hands and is very good at making small figurines. Three years ago, Rex opened Bronze Age Miniatures (BAM) for business as a sole proprietorship. BAM produces miniature characters ranging from sci-fi characters (his favorite) to historical characters like George Washington (the most popular), Business has been going very well for him, and he has provided the following information relating to his business a. Rex received approval from the IRS to switch from the cash method of accounting to the accrual method of accounting effective January 1 of this year. At the end of last year, BAM reported accounts receivable that had not been included in income under the accrual method of $17,500 and accounts payable that had not been deducted under the accrual method of $5,700. b. In March, BAM sold 6,900 miniature historical figures to History R Us Inc. (HRU), a retailer of historical artifacts and figurines, for $172,500. C. HRU was so impressed with the figurines that it purchased in March that it wanted to contract with BAM to continue to produce the figurines for it for the next three years. HRU paid BAM $399,168 ($22 per figurine) on October 30 of this year, to produce 504 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 504 figurines on November 30 and again on December 30. Rex elects to use the deferral method to account for the transaction d. Though the sci-fi figurines were not quite as popular, BAM sold 411 figurines at a sci-fi convention in April. Rex accepted cash only and received $15,207 for these sales. e. In January, BAM determined that it would not be able to collect on $4,200 of its beginning-of-the-year receivables, so it wrote off $4,200 of specific receivables. BAM sold 176,000 other figurines on credit for $387,200. BAM estimates that it will be unable to collect 5 percent of the sales revenue from these sales but it has not been able to specifically identify any accounts to write off. f. Assume that BAM correctly determined that its cost of goods sold this year is $271,040. g. The sci-fi convention in April was held in Chicago, Illinois. Rex attended the convention because he felt it was a good opportunity to gain new customers and to get new ideas for figurines. He paid $900 round-trip airfare. $197 for entrance to the convention,

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Answer 1

a.	Rex received approval from the IRS to switch from the cash method of accounting to the accrual method of accounting effective January 1 of this year. At year-end of last year, BAM reported accounts receivable that had not been included in income under the accrual method of $17,500 and accounts payable that had not been deducted under the accrual method of $5700	$                                2,950.00	17,500 AR – 5,700 AP = 11,800; 11,800 × 25% = $2950. A positive adjustment is included over 4 years (25% a year
b.	In March, BAM sold 6900 miniature historical figures to History R Us Inc. (HRU), a retailer of historical artifacts and figurines, for $172,500.	$                            172,500.00	Sale to HRU
c.	HRU was so impressed with the figurines that it purchased in March that it wanted to contract with BAM to continue to produce the figurines for them for the next three years. HRU paid BAM $399168 ($22 per figurine) on October 30 of this year, to produce 504 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 504 figurines on November 30 and again on December 30. Rex elects to use the deferral method to account for the transaction.	$                              22,176.00	Using the deferral method for accrual, only amount earned is recognized (2 months. × $22 per unit × 504 units)
d.	Though the sci-fi figurines were not quite as popular, BAM sold 447 figurines at a sci-fi convention in April. Rex accepted cash only and received $15207 for these sales.	$                              15,207.00	Sales at Sci-Fi convertion
e(a)	In January, BAM determined that it would not be able to collect on $4,200 of its beginning-of-the-year receivables, so it wrote off $4,200 of specific receivables. BAM sold 176,000 other figurines on credit for $387,200. BAM estimates that it will be unable to collect 5 percent of the sales revenue from these sales but it has not been able to specifically identify any accounts to write off.	($4,200)	Can only deduct amounts actually written off as uncollectible. Other expense for Schedule C.
e(b)		$                            387,200.00	Under the accrual method included income at time of sale
f.	Assume that BAM correctly determined that its cost of goods sold this year is $271040	$                          (271,040.00)	Cost of goods sold
g.	The sci-fi convention in April was held in Chicago, Illinois. Rex attended the convention because he felt it was a good opportunity to gain new customers and to get new ideas for figurines. He paid $900 round-trip airfare, $197 for entrance to the convention, $295 for lodging, $125 for cab fare, and $178 for meals during the trip. He was busy with business activities the entire trip.	$                              (1,606.00)	$900 airfare + $197 convention fee + $295 lodging + $125 cab fare + $89 meals [0.5 of $178].
h.	On August 1, BAM purchased a 12-month insurance policy that covers its business property for accidents and casualties through July 31 of next year. The policy cost BAM $7860	$                              (7,860.00)	This prepayment qualifies under the 12-month rule and it is a payment liability so it meets the economic performance test when it pays to the insurance company in August
i.	BAM reported depreciation expense of $7,500  for this year.	$                              (7,500.00)	depreciation
j.	Rex had previously operated his business out of his garage, but in January he decided to rent a larger space. He entered into a lease agreement on February 1 and paid $18,720 ($1,560 per month) to possess the space for the next 12 months (February of this year through January of next year).	$                            (17,160.00)	Economic performance for rent expense occurs over the rental period. Because no expenditure is accrued, the 12 month rule is inapplicable. Rex may only deduct rent for 11 months it was renting the property (11 mos. × $1,560)
k.	Before he opened his doors for business, Rex spent $50000 investigating and otherwise getting ready to do business. He expensed $5,000 immediately and is amortizing the remainder using the straight-line method over 180 months.	$                              (3,000.00)	50,000 – 5,000 expensed immediately = 45000; 45000 / 180 mos. = 250; 250 × 12 mos. = $3000 Other expense for Schedule C
l.	In December, BAM agreed to a 12-month $11,750 contract with Advertise-With-Us (AWU) to produce a radio ad campaign. BAM paid $3,900 up front (in December of this year) and AWU agreed that BAM would owe the remaining $7,850 only if BAM’s sales increased by 15 percent over the nine-month period after the contract was signed.	$                                 (654.17)	$7850  is not deductible because the liability is not fixed. Economic performance for the $7850 occurs as AWU provides services. Thus, BAM may only deduct the portion of this expense that relates to December (7850/ 12)
m.	In November of this year, BAM paid $3000 in business property taxes (based on asset values) covering the period December 1 of this year through November 30 of next year. In November of last year, BAM paid $2000 for business property taxes (based on asset values) covering the period December 1 of last year through November 30 of this year.	$                              (3,000.00)	Taxes are payment liabilities so economic performance and the deduction occurs when BAM pays the taxes