27: Andy recently
completed medical school and is beginning his medical practice. Most of his patients are covered by health
insurance with a co-pay requirement (e.g., the patient pays $10, and the
insurance company is billed for the remainder).
It takes approximately two months to collect from the health insurance
plan. What advice can you provide Andy
regarding the selection of a tax accounting method?
28: A taxpayer is
considering three alternative investments of $10,000. Assume that the taxpayer is in the 28%
marginal tax bracket for ordinary income and 15% for qualifying capital gains
in all tax years. The selected
investment will be liquidated at the end of five years. The alternatives are:
·
A taxable corporate bond yielding 5% before
tax, and the interest can be reinvested at 5% before tax.
·
A series EE bond that will have a maturity
value of $12,200 (a 4% before-tax rate of return).
·
Land that will increase in value.
The gain on the land will be classified and taxed as a
long-term capital gain. The income from
the bonds is taxed as ordinary income.
How much must the land increase in value to yield a greater after-tax
return than either of the bonds?
Given: Compound
amount of $1 and compound value of annuity payments at the end of five years:
|
Interest |
$1 |
$1 |
|
5% |
$1.28 |
$5.53 |
|
4% |
1.22 |
5.42 |
|
3.6% |
1.19 |
5.37 |
29: Determine the
taxpayer’s gross income for tax purposes in each of the following situations:
a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest
of $300 for corporate stock with a fair market value of $12,000 at the time of
the exchange. Deb’s cost of the bond was
$10,000. The value of the stock had
decreased to $11,000 by the end of the year
b.
Deb needed $10,000 to make a down payment on her
house. She instructed her broker to sell
some stock to raise the $10,000. Deb’s
cost of the stock was $3,000. Based on
her broker’s advice, instead of selling the stock, she borrowed the $10,000
using the stock as collateral for the debt.
c.
Deb’s boss gave her two tickets to the Rabid
Rabbits rock concert because she met her sales quota. At the time she received the tickets, each
ticket had a face price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were
selling for $250 each. Deb and her son
attended the concert.
30: Determine Amos
Watkin’s gross income in each of the following cases:
a. In the current year, Amos purchased an automobile for $25,000. As part of the transaction, Amos received
$1,500 rebate from the manufacturer.
b.
Amos sold his business. In addition to the selling price of the
stock, he received $50,000 for a covenant not to compete – an agreement that he
will not compete with his former business for five years
c.
Amos owned some land he held as an
investment. As a result of a change in
the zoning rules, the property increased in value by $20,000.
31: Al is a
medical doctor who conducts his practice as a sole proprietor. During 2013, he received cash of $280,000 for
medical services. Of the amount
collected, $40,000 was for services provided in 2012. At the end of 2013, Al had accounts
receivable of $60,000, all for services rendered in 2013. In addition, at the end of the year, Al
received $12,000 as an advance payment for a health maintenance organization
(HMO) for services to be rendered in 2014.
Compute Al’s gross income for 2013:
a. Using the cash basis of accounting.
b.
Using the accrual basis of accounting.
c.
Advise Al on which method of accounting he
should use.
32: Selma operates
a contractor’s supply store. She
maintains her books using the cash method.
At the end of the year, her accountant computes her accrual basis income
that is used on her tax return. For
2013, Selma had cash receipts of $1.4 million, which included $200,000
collected on accounts receivable from 2012 sales. It also included the proceeds of a $100,000
bank loan. At the end of 2013, she had
$250,000 in accounts receivable from customers, all from 2013 sales.
a. Compute Selma’s accrual basis gross receipts for 2013.
b. Selma paid cash for all of the purchases. The total amount paid for merchandise in 2013
was $1.3 million. At the end of 2012,
she had merchandise on hand was $300,000.
Compute Selma’s gross income from merchandise sales for 2013.
33: Your client is
a new partnership, ARP Associates, which is an engineering consulting
firm. Generally, ARP bills clients for
services at the end of each month.
Client billings are about $50,000 each month. On average, it takes 45 days to collect the
receivables. ARP’s expenses are
primarily for salary and rent. Salaries
are paid on the last day of each month, and rent is paid on the first day of
each month. The partnership has a line
of credit with a bank, which requires monthly financial statements. These must be prepared using the accrual
method. ARP’s managing partner, Amanda
Sims, has suggested that the firm also use the accrual method for tax purposes
and thus reduce accounting fees by $600.
Assume that the partners are in the 35% (combined Federal and State)
marginal tax bracket. Write a letter to
your client explaining why you believe it would be worthwhile for ARP to file
its tax return on the cash basis even though its financial statements are
prepared on the accrual basis. ARP’s
address is 100 James Tower, Denver, CO
80208.
35: Determine the
effects of the following on a cash basis taxpayer’s gross income for 2013 and
2014.
a. On the morning of December 31, 2013, the taxpayer received a $1,500
check from a customer. The taxpayer did
not cash the check until January 3, 2014.
b.
The same as part (a), except the customer
asked the taxpayer not to cash the check until January 3, 2014, after the
customer’s salary check could be deposited.
c.
The same as part (a), except the check was
not received until after the bank had closed on December 31, 2013.
36: Marlene, a
cash basis taxpayer, invests in Series EE U.S. government savings bonds and
bank certificates of deposit (CDs).
Determine the tax consequences of the following on her 2013 gross
income:
a. On September 30, 2013. She cashed in Series EE bonds for $10,000. She purchased the bonds in 2003 for
$7,090. The yield to maturity on the
bonds was 3.5%.
b.
On July 1, 2012, she purchased a CD for
$10,000. The CD matures on June 30,
2014, and will pay $10,816, thus yielding a 4% annual return.
c. On July 1, 2013, she purchased a CD for $10,000. The maturity date on the CD was June 30,
2014, when Marlene would receive $10,300.
