Hank started a new business, Hanks Donut World (HW for short), in June of last year. He has requested your advice on the following specific tax matters associated with HWs first year of operations. Hank has estimated HWs income for the first year as follows: (Do not round intermediate calculations.) Revenue: Donut sales $ 268,000 Catering revenues 80,190 $ 348,190 Expenditures: Donut supplies $ 134,320 Catering expense 31,990 Salaries to shop employees 56,500 Rent expense 43,490 Accident insurance premiums 8,592 Other business expenditures 7,810 - 282,702 Net Income $ 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. A small minority of HW clients complained about the catering service. To mitigate these complaints, Hanks 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. 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 didnt relate to last year, Hank excluded the entire amount when he calculated catering revenues. In July, HW paid $1,980 to ADMAN Co. 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. 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. On 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. 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, $9,570, until after January 1 (apparently because WEGO didnt 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 $9,570 in last years 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 $5,500 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 citys anniversary. The city agreed to pay $7,580 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 $5,820. 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 Hanks estimate of HWs income for the first year of operations. Required: Hank files his personal tax return on a calendar year, but he has not yet filed last years personal tax return nor has he filed a tax return reporting HWs results for the first year of operations. Explain when Hank should file the tax return for HW and calculate the amount of taxable income generated by HW last year. Determine the taxable income that HW will generate if Hank chooses to account for the business under the accrual method.

2.

Rex loves to work with his hands and is very good at making small figurines. Three years ago, Rex opened Bronze Age Miniatures (BAM) for business as a sole proprietorship. BAM produces miniature characters ranging from sci-fi characters (his favorite) to historical characters like George Washington (the most popular). Business has been going very well for him, and he has provided the following information relating to his business.

Rex received approval from the IRS to switch from the cash method of accounting to the accrual method of accounting effective January 1 of this year. At the end of last year, BAM reported accounts receivable that had not been included in income under the accrual method of $14,500 and accounts payable that had not been deducted under the accrual method of $9,150.

In March, BAM sold 9,000 miniature historical figures to History R Us Inc. (HRU), a retailer of historical artifacts and figurines, for $216,000.

HRU was so impressed with the figurines that it purchased in March that it wanted to contract with BAM to continue to produce the figurines for it for the next three years. HRU paid BAM $387,828 ($21 per figurine) on October 30 of this year, to produce 513 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 513 figurines on November 30 and again on December 30. Rex elects to use the deferral method to account for the transaction.

Though the sci-fi figurines were not quite as popular, BAM sold 453 figurines at a sci-fi convention in April. Rex accepted cash only and received $16,308 for these sales.

In January, BAM determined that it would not be able to collect on $4,800 of its beginning-of-the-year receivables, so it wrote off $4,800 of specific receivables. BAM sold 149,000 other figurines on credit for $312,900. BAM estimates that it will be unable to collect 5 percent of the sales revenue from these sales but it has not been able to specifically identify any accounts to write off.

Assume that BAM correctly determined that its cost of goods sold this year is $214,560.

The sci-fi convention in April was held in Chicago, Illinois. Rex attended the convention because he felt it was a good opportunity to gain new customers and to get new ideas for figurines. He paid $360 round-trip airfare, $166 for entrance to the convention, $222 for lodging, $130 for cab fare, and $162 for meals during the trip. He was busy with business activities the entire trip.

On August 1, BAM purchased a 12-month insurance policy that covers its business property for accidents and casualties through July 31 of next year. The policy cost BAM $7,560.

BAM reported depreciation expense of $6,900 for this year.

Rex had previously operated his business out of his garage, but in January he decided to rent a larger space. He entered into a lease agreement on February 1 and paid $23,400 ($1,950 per month) to possess the space for the next 12 months (February of this year through January of next year).

Before he opened his doors for business, Rex spent $35,500 investigating and otherwise getting ready to do business. He expensed $5,000 immediately and is amortizing the remainder using the straight-line method over 180 months.

In December, BAM agreed to a 12-month, $13,500 contract with Advertise-With-Us (AWU) to produce a radio ad campaign. BAM paid $4,200 up front (in December of this year) and AWU agreed that BAM would owe the remaining $9,300 only if BAMs sales increased by 15 percent over the 9-month period after the contract was signed.

In November of this year, BAM paid $3,600 in business property taxes (based on asset values) covering the period December 1 of this year through November 30 of next year. In November of last year, BAM paid $2,600 for business property taxes (based on asset values) covering the period December 1 of last year through November 30 of this year.

What amount will increase taxable income (positive) or reduce taxable income (negative) for each of the above scenarios? (Enter the write-off of the receivable under e-1 and the sales under e-2. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

equired: 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 file the tax return for HW and calculate the amount 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. a. The tax return is due by Taxable income b. Taxable income