Written Assignment 3
Question 13 (who is the taxpayer?)
Unfortunately Anita is not correct in her analysis because her and the attorney are not partners. That would make her gross income the full amount of the settlement, which is $480,000, and because the settlement is associated with a discrimination lawsuit, she is allowed a $160,000 deduction for AGI.
Problem 31 (accrual versus cash basis)
a. Al’s gross income for 2012 is $292,000, which is the amount that he collected in 2012. b. Al’s gross income computed by the accrual method:
Cash received| $292,000|
Less: income received but not earned until 2013| (12,000)| Less beginning of the year accounts receivable| (40,000)| Plus: end of year accounts receivable| 60,000| | $300,000|
c. The cash method of accounting would be best for Al to use so that he does not have to end up paying income taxes on uncollected accounts receivable.
Problem 34 (accrual method and disputed income)
To: Susan Apple
From: Bill Swan
Subject: Dispute Over Recording of Income by Trip Garage, Inc.
Date: October 1, 2013
Ms. Apple, I am responding to the questions you raised concerning the timing of the reporting of income by Trip Garage, Inc., from repairing Samuel Mosley’s car. The key issue is whether the Garage
(1) should accrue the $1,000 of income in 2012 and take a $100 loss deduction in 2013
(2) report the $900 in 2013.
An accrual basis taxpayer is required to recognize income when (1) all the events have occurred to establish the taxpayer’s right to receive the income, and (2) the amount of the income can be determined...