Comprehensive Problem $01-83($LO $01-1,$ LO $01-2,$ LO $01-3,$ LO $01-4)($Static$)$

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$\text{'}$s first year of operations. Hank has estimated HW$\text{'}$s income for the first year as follows:

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.

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 $$1,700,$ and Hank reduced the reported catering fees for the first year to reflect

the expected refund.

In the first year, HW received a $$6,750$ 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.

In July, HW paid $$1,500$ to ADMAN Company for an advertising campaign to distribute fliers advertising HW$\text{'}$s catering service.

Unfortunately, this campaign violated a city code restricting advertising by fliers, and the city fined HW $$250$ for the violation. HW

paid the fine, and Hank included the fine and the cost of the campaign in "other business" expenditures.

In July, HW also paid $$8,400$ 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 $$8,400$ as accident insurance premiums.

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 $$2,000$ as a damage deposit and $$8,050$ for rent $($$$805$ per month$).$ Hank explained that the damage deposit was refundable

at the end of the lease. At this time, Hank also paid $$30,000$ to lease kitchen equipment for $24$ months $($ $$1,250$ per month$).$ Both

leases began on June $1$ of the first year. In his estimate, Hank deducted these amounts in total$)$ as rent expense.

Hank signed a contract hiring WEGO Catering to help cater breakfasts. At year$-$end, WEGO asked Hank to hold the last catering

payment for the year, $$9,250,$ until after January $1($apparently because WEGO didn't want to report the income on its tax return$).$ The

last check was delivered to WEGO in January after the end of the first year. However, because the payment related to the first year

of operations, Hank included the $$9,250$ in last year's catering expense.

Hank believes that the key to the success of HW has been hiring Jimbo Jones to supervise the donut production and manage the

shop. Because Jimbo is such an important employee, HW purchased a "key$-$employee" term$-$life insurance policy on his life. HW

paid a $$5,100$ premium for this policy, and it will pay HW a $$40,000$ death benefit if Jimbo passes away any time during the next $12$

months. The term of the policy began on September $1$ of last year, and this payment was included in "other business" expenditures.

In the first year, HW catered a large breakfast event to celebrate the city's anniversary. The city agreed to pay $$7,100$ for the event,

but Hank forgot to notify the city of the outstanding bill until January of this year. When he mailed the bill in January, Hank decided

to discount the charge to $$5,500.$ On the bill, Hank thanked the mayor and the city council for their patronage and asked them to

"send a little more business our way." This bill is not reflected in Hank's estimate of HW$\text{'}$s income for the first year of operations.

Required:

a$-1$ and a$-2.$ Hank files his personal tax return on a calendar year, but he has not yet filed last year's personal tax return, nor has he

filed a tax return reporting HW$\text{'}$s results for the first year of operations. Identify when Hank should file the tax return for HW and

calculate the amount of taxable income generated using the cash method by HW last year.

b$.$ Determine the taxable income that HW will generate if Hank chooses to account for the business under the accrual