two easy tax Q’s due 2 hours

Discussion Question 18-3 (LO. 1)

A law practice was incorporated on January 1, 2016, and expects to earn $25,000 per month before deducting the lawyer’s salary. The lawyer owns 100% of the stock. The corporation (a personal service corporation) and the lawyer both use the cash method of accounting. The corporation does not need to retain any of the earnings in the business; thus, the salary of the lawyer (a calendar year taxpayer) will equal the corporation’s net income before salary expense.

Complete the statement below in response to the following question: “If the corporation could choose any tax year and pay the lawyer’s salary at a time that would be most tax efficient (but at least once every 12 months), what tax year should the corporation choose and when should the salary be paid each year?”

The ideal tax year would end on December 1 , and the salary would be paid each January . By using a fiscal  year, the lawyer will always have $ _________ of deferred income.


Problem 18-47 (LO. 2)

Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At the end of the year (2016), the company hires you to convert the cash receipts and disbursements into accrual basis revenues and expenses. The total cash receipts are summarized as follows:

Cash sales   $150,000
Collections on accounts receivable   350,000
Bank loan   90,000
Total cash receipts   $590,000

The accounts receivable from customers at the end of the year are $120,000. You note that the accounts receivable at the beginning of the year were $190,000. The cash sales included $30,000 of prepayments for services to be provided over the period January 1, 2016, through December 31, 2018.

Do not round intermediate computations. If required, round your final answers to the nearest dollar.

a.  Of the adjustments below, classify as either “Yes” (those that will be made) or “No” (not made) regarding the $590,000 of cash receipts to be converted to the accrual method.

•  The ending accounts receivable are added to the cash receipts. Yes 
•  The beginning accounts receivable are added to the cash receipts. No 
•  The loan proceeds are deducted from the cash receipts. Yes 
•  The entire amount of the prepayment for services is deducted from the cash receipts. No 

The company’s accrual basis gross income for 2016 is $ ____________