Comprehensive Problem 9-83 (LO 9-1, LO 9-2, LO 9-3, LO 9-4) (Algo) 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 estimated HW's income for the first year as follows: $276.000 84, 510 $363.510 Reve:ue: Dort sales Catering reveues Expenditures: Darat suplies Caluin expe: Saartes to scop ployees Rent experts Accident Insurance $139, 39 31.030 58,500 15,210 -29., 078 Other business expendit.es Net Incone 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 credil. 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 $2,300, and I lank reduced the reported catering fees for the first year to reflect the expected refund. 2. In the first year, HW received a $7,110 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, Hunk excluded the entire amount when he calculated catering revenues. 3. In July, I IW pald $2,220 to ADMAN Co. for an advertising campaign to distribute fllers advertising IIW's catering service. Unfortunately, this campaign violated a city code restricting advertising by fliers, and the cily lined HW $370 for the violation. HW paid the line and Hunk included the line and the cost of the campaign in other business expenditures 4. In July, I IW also paid $8,688 for a 24 month Insurance policy that covers I IW for accidents and casualties beginning on August 1 of the first year. Hank deducted the entire 58,688 as accident insurance premiums. 5. In May of the first year, Hank signed a contract lo lease the HW donul shop for 10 months. In conjunction with the contract, Hank paid $2.240 as a damage deposit and $8,650 for rent ($865 per month). Hank explained that the damage deposit was refundable at the end of the lease. At this time. I lank also pald $34,320 to lease kitchen equipment for 24 months ($1,430 per month). Both leases began on June 1 of the first year. In his eslimale, Hank deducted these arounils ($45,210 in lolul) as ienl expense. 6. 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, 59,730, 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 list year of operations, Harik included the $9.730 in last year's catering expense. 7. Hank belleves 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" lerri-life insurance policy on his life. HW paid a $5,700 premiurri lur liiis 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 payinent was Included in other business" expenditures, 8. In the first year, HW catered a large breakfast event to celebrate the city's anniversary. The city agreed to pay $7,820 for the event, bul Hank lorgol lu nolily 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 $5,980. 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's income for the first year of operations. Required: a. 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's results for the first year of operations. Explain when Hank should lile the lax return for HW, and calculate the arrount of taxable income generated by HW last year b. Determine the taxable income that HW will generate if Hank chooses to account for the business under the accrual method. (Do not round intermediate calculations.) 2. The tax return is d. by Taxable income Taxable income