Harry started a new business in June of last year, Harrys Donut World (HW for short). He has requested your advice on the following specific tax matters associated with HWs first year of operations. Harry has estimated HWs income for the first year as follows: Revenue: Donut sales $ 252,000 Catering revenues 71,550 $ 323,550 Expenditures: Donut supplies $ 124,240 Catering expense 27,910 Salaries to shop employees 52,500 Rent expense 40,050 Accident insurance premiums 8,400 Other business expenditures 6,850 - 259,950 Net Income $ 63,600 HW operates as a sole proprietorship and Harry reports on a calendar-year. Harry 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 saleable). HW does not purchase donut supplies on credit nor do they generally make sales on credit. Harry has provided the following details for specific first-year transactions.

a. A small minority of HW clients complained about the catering service. To mitigate these complaints, Harrys 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 Harry reduced the reported catering fees for the first year to reflect the expected refund. (4marks)

b. 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 didnt relate to last year Harry excluded the entire amount when he calculated catering revenues. (4marks)

c. In July, HW paid $1,500 to RELIABLE Co for an advertising campaign to distribute fliers advertising HW 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 Harry included the fine and the cost of the campaign in other business expenditures. (4marks)

d. 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. Harry deducted the entire $8,400 as accident insurance premiums. (4marks)

e. On May of the first year, Harry signed a contract to lease the HW donut shop for 10 months. In conjunction with the contract, Harry paid $2,000 as a damage deposit and $8,050 for rent ($805 per month). Harry explained that the damage deposit was refundable at the end of the lease. At this time Harry 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, Harry deducted these amounts ($40,050 in total) as rent expense. (4marks)

f. Harry signed a contract hiring Quick Catering to help cater breakfasts. At year-end, Quick Catering asked Harry to hold the last catering payment for the year, $9,250, until after January 1 (apparently because Quick Catering didnt want to report the income on its tax return). The last check was delivered to Quick Catering in January after the end of the first year. However, because the payment related to the first year of operations, Harry included the $9,250 in last years catering expense. (4marks)

g. In the first year HW catered a large breakfast event to celebrate the citys anniversary. The city agreed to pay $7,100 for the event, but Harry forgot to notify the city of the outstanding bill until January of this year. When he mailed the bill in January, Harry decided to discount the charge to $5,500. On the bill Harry 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 Harrys estimate of HWs income for the first year of operations. (4marks)