A local McDonalds is operated as a franchise (treated as a separate taxable entity from McDonalds Corporation as a whole). During 2017, the local franchise had $300,000 in cash sales and the following cash expenditures:

Rental cost of restaurant venue ($2,000 per month, starting March. 1, 2017) $24,000 Franchise fee for 2017 (fully deductible) $30,000 Compensation for 2017 $53,000 Utilities for 2017 $9,500

In addition to the above, the owner contracted with a supplier to provide all the cleaning supplies for the location over a 12 month period starting on March 1, 2017. The owner paid $6,000 (the total cost for the contract) on April 1, 2017, and the same amount of supplies was brought in from the supplier each month. Finally, the owner paid the McDonalds Corporation a royalty fee at 6% of store sales for the 2017 year on December 30, 2017.

(8 points) Assuming the local McDonalds operates on a calendar year-end under the accrual method, what amount of net profit (loss) for the business was included in AGI for 2017?

(8 points) Assuming the local McDonalds operates on a calendar year-end under the cash method, what amount of net profit (loss) for the business was included in AGI for 2017?

Question 2

3. John Deere received an order for a $12,000 tractor from a customer on June 30, 2017 and delivered the tractor to the customer on July 31, 2017. The company sent the customer a bill saying they had to pay for the tractor by no later than January 31, 2018. John Deere uses a calendar year tax period. Based on phone calls with the customer in December of 2017, the customer explained that it may have to file bankruptcy proceedings but was trying to work its way out of financial hardship before taking that option. The customer said that at worst it would be able to pay at least $9,000 of the bill. On January 15, 2018, John Deere received a check from the customer for $9,000 and was informed it would receive no additional payment based on the outcome of the bankruptcy case. In addition to the transaction above, the following occurred:

A different customer paid for the same type of tractor (at $12,000) on November 1, 2017 and scheduled delivery for January 15, 2018. John Deere included the income in its 2017 financial accounting statements.

The company both incurred and paid expenses for the following in 2017:

Wages $3,000

Rental costs for a warehouse $4,000

Repairs $2,000

The company both incurred and paid expenses for the following in 2018:

Wages $4,000

Rental costs for a warehouse $4,000

Repairs $3,000

(9 points) Assuming the local John Deeres operates on a calendar year-end under the accrual method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2017?

(9 points) Assuming the local John Deeres operates on a calendar year-end under the accrual method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2018?

(9 points) Assuming the local John Deeres operates on a calendar year-end under the cash method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2017?

(9 points) Assuming the local John Deeres operates on a calendar year-end under the cash method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2018?

(8 points) How should the sum of the 2017 and 2018 accrual method net profit (loss) total relate to the sum of the 2017 and 2018 cash method net profit (loss) total (i.e. how should the sum of your answers in a. and b. relate to the sum of your answers in c. and d.)?

e. (8 points) How should the sum of the 2017 and 2018 accrual method net profit (loss) total relate to the sum of the 2017 and 2018 cash method net profit (loss) total (i.e. how should the sum of your answers in a. and b. relate to the sum of your answers in c. and d.)?

Circle the best answer below. i. The sum of the two years for the accrual method should be greater than the sum of the two years under the cash method. ii. The sum of the two years for the accrual method should be less than the sum of the two years under the cash method. iii. The sum of the two years for the accrual method should be equal to the sum of the two years under the cash method.