Questions -

Q1. Firm F, a calendar year tax payer, owes $200,000 long term debt to an unrelated creditor. In december it paid $14,160 to the creditor as an interest for the 12 month period from september 1st  through august 31st of the following year. Compute the deduction for this payment assuming that:

a. Firm F uses the cash method of accounting for tax purposes

b. Firm F uses the accrual method of accounting for tax purposes

Q2. EFG, an accrual basis calendar year corporation, reported $500,000 net income before tax on its financial statements prepared in accordance with GAAP. EFG's records reveal the following information.

A. The allowance for bad debts as of January 1 was $58,000. Write-offs for the year totaled $13,800, and the addition to the allowance for the year was $12,500. The allowance as of December 31 was $56,700.

B. EFG paid a $17,500 fine to the state of Delaware for violation of state pollution control laws.

C.  EFG was sued by a consumers group fr engaging in false advertising practices. Although EFG's lawyers are convinced that the suit is frivolous, its independent auditors insisted on establishing a $50,000 allowance for contingent legal liability and reporting a $50,000 accrued expense on the income statement.

D. EFG received a $165,000 advanced payment for 10,000 units of inventory on October 20. EFG reported the payment as revenue the following February when the units were shipped.

Compute EFG's taxable income

Q3. GreenUp a calendar year accrual basis taxpayer, provides landscaping installation and maintenance services to its customers. In August 2015, GreenUp contracted with a University to renovate its lawns and gardens. GreenUp agreed to complete the entire renovation by may 31, 2017, and the university prepaid the entire $100,000 fee. GreenUp completed 20% of the work in 2015, 65 % in 2016, and 15% in 2017.

A. How much revenue should greenup report on its financial statements for 2015, 2016, and 2017?

B. How much taxable income must greenup recognize in 2015, 2016, and 2017?

Q4. Ernlo is an accrual basis corporation with a june 30th fiscal year end. On june 2nd 2015, Ernlo entered into a binding contract to purchase a 6 month supply of hearing oil. from a local distributor at the current market price of $12,450. This price is guaranteed regardless of the market price on the delivery date. Enroll didn't pay its $12,450 bill from the supplier until july 8, and the distributer delivered the oil on october 15.

A. In which taxable year can Ernlo deduct $12,450 cost of heating oil if it doesn't elected the recurring item exception as its method of accounting for this annual expense?

B. In which taxable year can Ernlo deduct its $12,450 cost of heating oil if it elects the recurring item exception?

Q5. BZD, a calendar year corporation, made its following year end accruals for 2015 financial statement purposes. In each case determine how much of the accrued expense is deductible on BZD's 2015 federal tax return.

A. a $55,000 expense and a $55,000 liability for unpaid december salaries. BZD paid the entire liability to its employees before the end of january 2016.

B. A $40,000 expense and a $40,000 liability for the CEO's 2015 bonus. BZD paid $20,000 to the CEO on March 1st 2016and the remaining $20,000 on may 1st 2016. BZD and the CEO are not related parties.

C. A $219,700 expense and $219,700 liability for accumulated vacation pay. No employees took vacation between january 1st and march 15th 2016.

Q6. GK Company, a candor year accrual basis taxpayer, made the following adjustments to its allowance for bad debts this year.

January 1st allowance for bad debts: $86,100

Actual write offs of accounts receivable: (77,300)

addition to allowance at year end: 90,000

December 31st allowance for bbad debts: 98,800

A. Compute their bad debt expense for financial statement purposes.

B. Compute their tax deduction for bad debts.