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Andy Zheng Tax 3300 S. Melnik Hw #3 4. 38, 39, 40, 42, 46, & 59 38. Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the company's 2018 gross income assuming that the company uses any available options to defer its taxes. a. In December 2017, the company received a $1,200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2018, and Drake immediately delivered it to the customer. The sale was reported in 2018 for financial accounting purposes. The delivery date of the appliance is in 2018, thus prepaid income of $1,200 received in Dec 2017 is deferred until 2018. Tax & financial accounting conformity requirement. b. In October 2018, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 in July 2018. 6 months contract: $240 * (3/6) = $120. 36 months contract: $1,260 * (6/36) = $210. $120 + $210 = $330. Advance payments should be spread over the contract life. c. On December 31, 2018, the company sold an appliance for $1,200. The company received $500 cash and a note from the customer for $700 and $260 interest, to be paid at the rate of $40 a month for 24 months. Because of the customer's poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750. Company shall recognize gross income of $1,200 - $750 = $450 (gross profit from transaction.) The interest of $240 shall be taxed as it accrues. FMV of note is not relevant for determining gross income. 39. Freda is a cash basis taxpayer. In 2018, she negotiated her salary for 2019. Her employer offered to pay her $21,000 per month in 2019 for a total of $252,000. Freda countered that she would accept $10,000 each month for the 12 months in 2019 and the remaining $132,000 in January 2020. The employer accepted Freda's terms for 2019 and 2020. a. Did Freda actually or constructively received $252,000 in 2019? Freda is a cash basis taxpayer. Freda has not actually received $252,000 in 2019. She actually received $120,000 ($10,000 * 12) in 2019. b. What could explain Freda's willingness to spread her salary over a longer period of time? Freda is a cash basis taxpayer. If she receives 2019’s salary in 2020 for amount of $132,000 then her income of $132,000 will be taxable for year 2020 when she actually receives salary in cash instead of 2019 when it is accrued. So, it will help her in reducing tax on salary income in 2019. c. In December 2019, after Freda had earned the right to collect the $132,000 in 2019, the employer offered $133,000 to Freda at that time, rather than $132,000 in January 2020.

The employer wanted to make the early payment so as to deduct the expense in 2019. Freda rejected the employer's offer. Was Freda in constructive receipt of the income in 2019? Explain. Yes, the $132,000 actually received in 2020 is constructively received in 2019 because it was made available to her in that year. 40. The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent. a. Discuss the tax effects of the following alternatives: • $1,000 damage deposit with no rent prepayment. There is no tax on damage deposit kept as it is not revenue income. • $500 damage deposit and $500 rent for the final month of the lease. Tax need to be paid on rent income and not on damage deposit. • $1,000 rent for the final two months of the lease and no damage deposit. Tax need to be paid on rent income. b. Which option do you recommend? Why? Option 1 because of tax benefits 42. Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Troy is a full-time employee of the corporation and receives a salary of $60,000 per year. He also receives a bonus equal to 10% of all collections from clients he serviced during the year. Determine the tax consequences of the following events to the corporation and to Troy: a. On December 31, 2018, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2018. Troy did not deliver the check to the corporation until January 2019. 2018; 2019 b. The facts are the same as in part (a), except that the corporation is an accrual basis taxpayer and Troy deposited the check on December 31, but the bank did not add the deposit to the corporation's account until January 2019. 2018; 2019 c. The facts are the same as in part (a), except that the customer told Troy to hold the check until January 2019 when the customer could make a bank deposit that would cover the check. 2019; 2019 46. Nell and Kirby are in the process of negotiating their divorce agreement, to be finalized in 2018. What should be the tax consequences to Nell and Kirby if the following, considered individually, became part of the agreement? a. In consideration for her one-half interest in their personal residence, Kirby will transfer to Nell stock with a value of $200,000 and $50,000 of cash. Kirby's cost of the stock was $150,000, and the value of the personal residence is $500,000. They purchased the residence three years ago for $300,000. The transfer of the stock and residence in connection with the divorce are in actually non-taxable in the hands of Nell and Kirby. Kirby’s basis in the stock would be $150,000, at the same time basis in the house would be $300,000. However, the money received in the form of cash should be treated as alimony, unless the agreement says no.

b. Nell will receive $1,000 per month for 120 months. If she dies before receiving all 120 payments, the remaining payments will be made to her estate. The cash payment that is being made will actually not qualify to be alimony reason being is simple that this payment does not cease after Nell’s death. Thus Kirby is not allowed to deduct this sum from his AGI since it is not the alimony, also, at the same time; these payments are actually excluded from Nell’s gross income since they are actually received from her. c. Nell is to have custody of their 12-year-old son, Bobby. She is to receive $1,200 per month until Bobby (1) dies or (2) attains age 21 (whichever occurs first). After either of these events occurs, Nell will receive only $300 per month for the remainder of her life. The monthly payment that is being received by Nell is consisting child support ($900) and alimony amount ($300). It is alimony, reason being is simple that the payment of $300 will be continuing even after child dies or attains the maturity age of 21. Thus, it qualifies as alimony amount. And that is why this $300, must need to include in Nell’s AGI and the remaining $900 is child support. Also, since there is alimony paid, Kirby should definitely deduct the alimony of $300 (actual money paid) from his AGI. 59. MFJ return Wages and Salaries

$160,000

Taxable Interest Tax-exempt interest

$1,982 $900

Ordinary Dividends Qualified Dividends

$4,200 $4,200

Partnership

$7,000

AGI

$173,182

Itemized or Standard Deduction

($24,000)

Taxable Income

$149,182

Income tax payable

8,907.00 + 22% ($67,582) = $23,775.04

Tax on OID dividends

630

Federal Income Tax Withheld

($23,400)

Federal Income Tax Payments

($8,000)

Tax Refund

$6,995

Decrease in disposable income

Net change in income * (1.00 - .22) (-$37,000 + $4,000) * .88 = $25,740...