Hank started a new business, Hank’s Donut World (HW for short),in June of last year. He has requested your advice on the followingspecific tax matters associated with HW’s first year of operations.Hank has estimated HW’s income for the first year as follows: (Donot round intermediate calculations.) Revenue: Donut sales $282,000 Catering revenues 87,750 $ 369,750 Expenditures: Donutsupplies $ 143,140 Catering expense 35,560 Salaries to shopemployees 60,000 Rent expense 46,500 Accident insurance premiums8,760 Other business expenditures 8,650 - 302,610 Net Income $67,140 HW operates as a sole proprietorship and Hank reports on acalendar year. Hank uses the cash method of accounting and plans todo the same with HW (HW has no inventory of donuts because unsolddonuts are not salable). HW does not purchase donut supplies oncredit nor does it generally make sales on credit. Hank hasprovided the following details for specific first-yeartransactions. A small minority of HW clients complained about thecatering service. To mitigate these complaints, Hank’s policy is torefund dissatisfied clients 50 percent of the catering fee. By theend of the first year, only two HW clients had complained but hadnot yet been paid refunds. The expected refunds amount to $2,450,and Hank reduced the reported catering fees for the first year toreflect the expected refund. In the first year, HW received a$7,200 payment from a client for catering a monthly breakfast for30 consecutive months beginning in December. Because the paymentdidn’t relate to last year, Hank excluded the entire amount when hecalculated catering revenues. In July, HW paid $2,400 to ADMAN Co.for an advertising campaign to distribute fliers advertising HW'scatering service. Unfortunately, this campaign violated a city coderestricting advertising by fliers, and the city fined HW $400 forthe violation. HW paid the fine, and Hank included the fine and thecost of the campaign in “other business” expenditures. In July, HWalso paid $8,760 for a 24-month insurance policy that covers HW foraccidents and casualties beginning on August 1 of the first year.Hank deducted the entire $8,760 as accident insurance premiums. OnMay of the first year, Hank signed a contract to lease the HW donutshop for 10 months. In conjunction with the contract, Hank paid$2,300 as a damage deposit and $8,800 for rent ($880 per month).Hank explained that the damage deposit was refundable at the end ofthe lease. At this time, Hank also paid $35,400 to lease kitchenequipment for 24 months ($1,475 per month). Both leases began onJune 1 of the first year. In his estimate, Hank deducted theseamounts ($46,500 in total) as rent expense. Hank signed a contracthiring WEGO Catering to help cater breakfasts. At year-end, WEGOasked Hank to hold the last catering payment for the year, $9,850,until after January 1 (apparently because WEGO didn’t want toreport the income on its tax return). The last check was deliveredto WEGO in January after the end of the first year. However,because the payment related to the first year of operations, Hankincluded the $9,850 in last year’s catering expense. Hank believesthat the key to the success of HW has been hiring Jimbo Jones tosupervise the donut production and manage the shop. Because Jimbois such an important employee, HW purchased a “key-employee”term-life insurance policy on his life. HW paid a $5,850 premiumfor this policy and it will pay HW a $40,000 death benefit if Jimbopasses away any time during the next 12 months. The term of thepolicy began on September 1 of last year and this payment wasincluded in “other business” expenditures. In the first year, HWcatered a large breakfast event to celebrate the city’sanniversary. The city agreed to pay $8,000 for the event, but Hankforgot to notify the city of the outstanding bill until January ofthis year. When he mailed the bill in January, Hank decided todiscount the charge to $6,100. On the bill, Hank thanked the mayorand the city council for their patronage and asked them to “send alittle more business our way.” This bill is not reflected in Hank’sestimate of HW’s income for the first year of operations. Required:Hank files his personal tax return on a calendar year, but he hasnot yet filed last year’s personal tax return nor has he filed atax return reporting HW’s results for the first year of operations.Explain when Hank should file the tax return for HW and calculatethe amount of taxable income generated by HW last year. Determinethe taxable income that HW will generate if Hank chooses to accountfor the business under the accrual method.