Joe operates a business that locates and purchases specializedassets for clients, among other activities. Joe uses the accrualmethod of accounting but he doesn’t keep any significantinventories of the specialized assets that he sells. Joe reportedthe following financial information for his business activitiesduring year 0.
Determine the effect of each of the following transactions onthe taxable business income. (Select "No Effect" from thedropdown if no change in the taxable businessincome.)
Required:
Joe has signed a contract to sell gadgets to the city. Thecontract provides that sales of gadgets are dependent upon a testsample of gadgets operating successfully. In December, Joe delivers$13,350 worth of gadgets to the city that will be tested in March.Joe purchased the gadgets especially for this contract and paid$9,450.
Joe paid $275 for entertaining a visiting out-of-town client.The client didn’t discuss business with Joe during this visit, butJoe wants to maintain good relations to encourage additionalbusiness next year.
On November 1, Joe paid $590 for premiums providing for $59,000of “key man” insurance on the life of Joe’s accountant over thenext 12 months.
At the end of year 0, Joe’s business reports $11,850 of accountsreceivable. Based upon past experience, Joe believes that at least$2,570 of his new receivables will be uncollectible.
In December of year 0, Joe rented equipment to complete a largejob. Joe paid $5,850 in December because the rental agency requireda minimum rental of three months ($1,950 per month). Joe completedthe job before year-end, but he returned the equipment at the endof the lease.
Joe hired a new sales representative as an employee and sent herto Dallas for a week to contact prospective out-of-state clients.Joe ended up reimbursing his employee $490 for airfare, $540 forlodging, $440 for meals, and $340 for entertainment (Joe providedadequate documentation to substantiate the business purpose for themeals and entertainment). Joe requires the employee to account forall expenditures in order to be reimbursed.
Joe uses his BMW (a personal auto) to travel to and from hisresidence to his factory. However, he switches to a businessvehicle if he needs to travel after he reaches the factory. Lastmonth, the business vehicle broke down and he was forced to use theBMW both to travel to and from the factory and to visit work sites.He drove 215 miles visiting work sites and 84 miles driving to andfrom the factory from his home. Joe uses the standard mileage rateto determine his auto-related business expenses. (Roundyour answer to whole number. Use standard mileagerate.)
Joe paid a visit to his parents in Dallas over the Christmasholidays. While he was in the city, Joe spent $145 to attend ahalf-day business symposium. Joe paid $390 for airfare, $126 formeals during the symposium, and $77 on cab fare to thesymposium.
