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: 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 aje not salable). HW does not purchase donut supplies on credit, nor does it generally make sales on credit. Hank has provided the foliowing detalls for specific first-year transactions. 1. 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 $1,900, and Hank reduced the reported catering fees for the first year to reflect the expected refund. 2. In the first year, HW recelved a $6,870 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 \$1,740 to ADMAN Company for an advertising campaign to distribute filers advertising HWs catering service. Unfortunately, this campaign violated a city code restricting advertising by fliers, and the city fined HW$290 for the violation. HW to discount the charge to $5,bb. Un the Dill, Hank thanked the mayor ana the city council ror their patronage ana 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-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'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 method. Note: Do not round intermediate calculations. In July, HW paid \$1,740 to ADMAN Company for an advertising campaign to distribute fliers advertising HW's catering service. Unfortunately, this campaign violated a clty code restricting advertising by fllers, and the city fined HW$290 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 $8,496 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 $8,496 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 $2,080 as a dlomage deposit and $8,250 for rent ( $825 per month). Hank explained that the damage deposit was refundable at the end of the lease. At this time, Hank also paid $31,440 to lease kitchen equipment for 24 months ( $1,310 per month). Both leases began on June 1 of the first year. In his estimate. Hank deducted these amounts ($41,770 in total) as rent expense. 6. Hank signed o contract hiring WEGO Cotering to help cater breakfosts. At year-end, WEGO asked Hank to hold the last cotering payment for the year, \$9,410, unti after January 1 (opparently because WEGO didn't want to report the income on its tax return). The last check was delvered 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 $9,410 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" term-life insurance policy on his life. HW paid a $5,300 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. 8. In the first year, HW catered a large breakfast event to celebrate the city's anniversary. The city agreed to pay $7,340 for the event, but Hank forgot to notify the city of the outstanding bill until January of this year. When he malled the bill in January, Hank decided to discount the charge to $5,660. On the bill, Hank thanked the mayor and the clty council for their patronage and asked them to "send a little more business our way." This bili is not reflected in Hank's estimate of HW's income for the first year of operations