2 Hank started a new business, Hank's Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HW's first year of operations. Hank has estimated HW's income for the first year as follows: $ 268,000 80, 190 $ 348,190 45 points Revenue : Donut sales Catering revenues Expenditures: Donut supplies Catering expense Salaries to shop employees Rent expense Accident insurance premiums Other business expenditures Net Income $ 134,320 31,990 56,500 43,490 8,592 7,810 eBook -282,702 $ 65,488 HW operates as a sole proprietorship, and Hank reports on a calendar year. Hank uses the cash method of accounting and plans to do the same with HW (HW has no inventory of donuts because unsold donuts are not salable). HW does not purchase donut supplies on credit, nor does it generally make sales on credit. Hank has provided the following details for specific first-year transactions. 1. A small minority of HW clients complained about the catering service. To mitigate these complaints, Hank's policy is to refund dissatisfied clients 50 percent of the catering fee. By the end of the first year, only two HW clients had complained but had not yet been paid refunds. The expected refunds amount to $2,100, and Hank reduced the reported catering fees for the first year to reflect the expected refund. 2. In the first year, HW received a $6,990 payment from a client for catering a monthly breakfast for 30 consecutive months beginning in December. Because the payment didn't relate to last year, Hank excluded the entire amount when he calculated catering revenues. 3. In July, HW paid $1,980 to ADMAN Company for an advertising campaign to distribute fliers advertising HW's catering service. Unfortunately, this campaign violated a city code restricting advertising by fliers, and the city fined HW $330 for the violation. HW paid the fine, and Hank included the fine and the cost of the campaign in "other business" expenditures. 4. In July, HW also paid $8,592 for a 24-month insurance policy that covers HW for accidents and casualties beginning on August 1 of the first year. Hank deducted the entire $8,592 as accident insurance premiums. 5. In May of the first year, Hank signed a contract to lease the HW donut shop for 10 months. In conjunction with the contract, Hank paid $2,160 as a damage deposit and $8,450 for rent ($845 per month). Hank explained that the damage deposit was refundable at the end of the lease. At this time, Hank also paid $32,880 to lease kitchen equipment for 24 months ($1,370 per month). Both leases began on June 1 of the first year. In his estimate, Hank deducted these amounts ($43,490 in total) as rent expense. 6. Hank signed a contract hiring WEGO Catering to help cater breakfasts. At year-end, WEGO asked Hank to hold the last catering navment for the voar 49 570 until after lanuary 1 lannarently herance WEGO didn't want to renart the income on its tav return! The 2 Hank started a new business, Hank's Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HW's first year of operations. Hank has estimated HW's income for the first year as follows: $ 268,000 80, 190 $ 348,190 45 points Revenue : Donut sales Catering revenues Expenditures: Donut supplies Catering expense Salaries to shop employees Rent expense Accident insurance premiums Other business expenditures Net Income $ 134,320 31,990 56,500 43,490 8,592 7,810 eBook -282,702 $ 65,488 HW operates as a sole proprietorship, and Hank reports on a calendar year. Hank uses the cash method of accounting and plans to do the same with HW (HW has no inventory of donuts because unsold donuts are not salable). HW does not purchase donut supplies on credit, nor does it generally make sales on credit. Hank has provided the following details for specific first-year transactions. 1. A small minority of HW clients complained about the catering service. To mitigate these complaints, Hank's policy is to refund dissatisfied clients 50 percent of the catering fee. By the end of the first year, only two HW clients had complained but had not yet been paid refunds. The expected refunds amount to $2,100, and Hank reduced the reported catering fees for the first year to reflect the expected refund. 2. In the first year, HW received a $6,990 payment from a client for catering a monthly breakfast for 30 consecutive months beginning in December. Because the payment didn't relate to last year, Hank excluded the entire amount when he calculated catering revenues. 3. In July, HW paid $1,980 to ADMAN Company for an advertising campaign to distribute fliers advertising HW's catering service. Unfortunately, this campaign violated a city code restricting advertising by fliers, and the city fined HW $330 for the violation. HW paid the fine, and Hank included the fine and the cost of the campaign in "other business" expenditures. 4. In July, HW also paid $8,592 for a 24-month insurance policy that covers HW for accidents and casualties beginning on August 1 of the first year. Hank deducted the entire $8,592 as accident insurance premiums. 5. In May of the first year, Hank signed a contract to lease the HW donut shop for 10 months. In conjunction with the contract, Hank paid $2,160 as a damage deposit and $8,450 for rent ($845 per month). Hank explained that the damage deposit was refundable at the end of the lease. At this time, Hank also paid $32,880 to lease kitchen equipment for 24 months ($1,370 per month). Both leases began on June 1 of the first year. In his estimate, Hank deducted these amounts ($43,490 in total) as rent expense. 6. Hank signed a contract hiring WEGO Catering to help cater breakfasts. At year-end, WEGO asked Hank to hold the last catering navment for the voar 49 570 until after lanuary 1 lannarently herance WEGO didn't want to renart the income on its tav return! The