ABC Corp. is a calendar year, accrual basis taxpayer. ABC sells, installs, and services computer systems...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
ABC Corp. is a calendar year, accrual basis taxpayer. ABC sells, installs, and services computer systems and networks. It has an audited financial statements that are provided to the bank in support of their line of credit. Gross sales have been $30-$35 million for the past five years. The audit firm has also been preparing the corporate tax return. As no one at the audit firm has any tax knowledge or experience, it has been filing the returns using the GAAP basis financial statements without any adjustment. You met Joe Axl, the 85% shareholder of ABC at a party and was so impressed by your tax knowledge (he knew you took Tax 507 at Walsh College from Professor Alfonsi) that he wants to transfer the tax work to your firm. You were provided the prior year's return on May 1, 2020 and noted the following items when reviewing their 2019 Form 1120: There is a liability at 12.31.2019 for $2.5 million. Joe said that represents prepaid service contracts. ABC sells prepaid service contracts to their customers. Customers pay for a 5 year contract upfront and all computer/network service is covered. He provides you the following schedule: Income Recognized Year of Sale Received 2015 2016 2017 2018 2019 2019 $ 1,000,000 $ $ $ $ $ Balance (60,000) $940,000 2018 $ 800,000 $ $ $ $ (20,000) $ (150,000) $ 630,000 2017 $ 1,200,000 $ $ $ (70,000) $ (350,000) $ (250,000) $530,000 2016 $ 600,000 $ $ 2015 $ 1,000,000 $ (200,000) $ (50,000) $ (100,000) $ (100,000) $ (400,000) $ (75,000) $ (100,000) $ (75,000) $ 300,000 (100,000) $ 100,000 $2,500,000 ABC collected $1.5 million in prepaid service contracts in 2020 and recognized $150,000 for book/GAAP purposes. In connection with the service contracts, ABC records a liability at the time of the sale for its expected costs in servicing their customers. At 12.31.2019, ABC had a Reserve for Service Contract Costs of $1 million. For 2020, ABC recorded an additional liability of $750,000 with respect to the 2020 prepaid service contracts. ABC incurred $25,000 of time and material with respect to these contracts in 2020. ABC incurred $250,000 of time and material costs in 2020 for all prior prepaid service contracts. There is a bonus/commission payable liability at 12.31.2019 for $650,000 representing commissions payable to non-owner sales persons of $400,000 and a $250,000 bonus to Joe AxI. ABC paid $300,000 of the commissions on March 1, 2020 and the remaining $100,000 on April 1, 2020. Joe's bonus was paid on March 1, 2020. Based on the above, what can you tell Joe regarding 2020 taxable income? Consider: 1. Any potential change in accounting methods that should be considered for 2020; consider all options. 2. Assuming ABC does change its accounting method for tax purposes, what is the impact of the above transactions on 2020 taxable income, i.e. how much income should be reported and how much deductions can be claimed. 3. If ABC does not change its accounting methods, what advice can you give Joe? ABC Corp. is a calendar year, accrual basis taxpayer. ABC sells, installs, and services computer systems and networks. It has an audited financial statements that are provided to the bank in support of their line of credit. Gross sales have been $30-$35 million for the past five years. The audit firm has also been preparing the corporate tax return. As no one at the audit firm has any tax knowledge or experience, it has been filing the returns using the GAAP basis financial statements without any adjustment. You met Joe Axl, the 85% shareholder of ABC at a party and was so impressed by your tax knowledge (he knew you took Tax 507 at Walsh College from Professor Alfonsi) that he wants to transfer the tax work to your firm. You were provided the prior year's return on May 1, 2020 and noted the following items when reviewing their 2019 Form 1120: There is a liability at 12.31.2019 for $2.5 million. Joe said that represents prepaid service contracts. ABC sells prepaid service contracts to their customers. Customers pay for a 5 year contract upfront and all computer/network service is covered. He provides you the following schedule: Income Recognized Year of Sale Received 2015 2016 2017 2018 2019 2019 $ 1,000,000 $ $ $ $ $ Balance (60,000) $940,000 2018 $ 800,000 $ $ $ $ (20,000) $ (150,000) $ 630,000 2017 $ 1,200,000 $ $ $ (70,000) $ (350,000) $ (250,000) $530,000 2016 $ 600,000 $ $ 2015 $ 1,000,000 $ (200,000) $ (50,000) $ (100,000) $ (100,000) $ (400,000) $ (75,000) $ (100,000) $ (75,000) $ 300,000 (100,000) $ 100,000 $2,500,000 ABC collected $1.5 million in prepaid service contracts in 2020 and recognized $150,000 for book/GAAP purposes. In connection with the service contracts, ABC records a liability at the time of the sale for its expected costs in servicing their customers. At 12.31.2019, ABC had a Reserve for Service Contract Costs of $1 million. For 2020, ABC recorded an additional liability of $750,000 with respect to the 2020 prepaid service contracts. ABC incurred $25,000 of time and material with respect to these contracts in 2020. ABC incurred $250,000 of time and material costs in 2020 for all prior prepaid service contracts. There is a bonus/commission payable liability at 12.31.2019 for $650,000 representing commissions payable to non-owner sales persons of $400,000 and a $250,000 bonus to Joe AxI. ABC paid $300,000 of the commissions on March 1, 2020 and the remaining $100,000 on April 1, 2020. Joe's bonus was paid on March 1, 2020. Based on the above, what can you tell Joe regarding 2020 taxable income? Consider: 1. Any potential change in accounting methods that should be considered for 2020; consider all options. 2. Assuming ABC does change its accounting method for tax purposes, what is the impact of the above transactions on 2020 taxable income, i.e. how much income should be reported and how much deductions can be claimed. 3. If ABC does not change its accounting methods, what advice can you give Joe?
Expert Answer:
Related Book For
Financial Management Principles and Applications
ISBN: 978-0134417219
13th edition
Authors: Sheridan Titman, Arthur J. Keown, John H. Martin
Posted Date:
Students also viewed these accounting questions
-
Utilizing resoorces, complete a risk audit of Bank of Americas project to acquire Merrill Lynch. Ensure you address all 10 critical success factors. From the evidence of your audit, would you advise...
-
Her Passion for Fashion Bobbi Jean Donnelly was hardened by her humble beginnings in rural Mississippi. The fourth of six children in a blue-collar working-class family, she spent the early years of...
-
Consider a post office with two employees and a single waiting line. On average, the inter-arrival time is 6 minutes. Standard deviation of inter-arrival time is 3.94 minutes. Average service time is...
-
According to economist Gabriel Zucman, why is Europe actually a net creditor when the commonly used international financial data seem to show it is a net debtor? What does the commonly used data...
-
For 2018, Essence Company, a calendar year taxpayer, will change from using the cash method for tax purposes to the accrual method. At the end of 2017, Essence had the following items: Accounts...
-
Can you create a graphic of the Fairmont payroll systems company expenses that highlight general accounting clerk, Mary Perez, has company expenses for FICA (social security), Medicare and 401K,...
-
Data related to the expected sales of mountain bikes and road bikes for Cycle Sports Inc, for the current year, which is typical of recent years, are as follows: Products......Unit Selling...
-
A small electric immersion heater is used to heat 87 g of water for a cup of instant coffee. The heater is labeled "120 watts" (it converts electrical energy to thermal energy at this rate)....
-
1. A new drug has been developed to cure a rare disease. 20 people infected with the disease are randomly selected and 16 of them are cured. a) Use the following uniform prior: define 101 hypotheses...
-
Companies that cannot identify any type of competitive advantage are classified as ______. Multiple choice question. being focused on using generic strategies having too much focus on a low-cost...
-
Under what circumstances, if any, could one of the partners' allocation of a loss result in an increase in her capital account? Select answer from the options below After deducting the salary and...
-
What is MACRS deductions for assets placed in service in tax years beginning before 2 0 2 2 of following below? Depreciable property that Rapid Appliance Repair purchased and placed into service...
-
When are project managers assigned to a project? After the Project Charter has been approved Before the Project Charter is developed As soon as possible and before the Planning phase begins During...
-
A CPA was reviewing with her clients what their estimated tax payments were expected to be for the upcoming year. From the prior year the clients had an AGI of $137,500 and had paid federal income...
-
The surface area of the lungs is about 75 m2, and the thickness of the alveolar diffusion layer is about 0.5 micrometers. The P02 in alveolar air is 100 mmHg, while the Po2 of venous blood is 40...
-
7 A 29-year-old, previously healthy man suddenly collapses at a party where legal and illicit drugs are being used. Enroute to the hospital, he requires resuscitation with defibrillation to establish...
-
In Regardless of Your Major: Capital Structure Matters to You! on page 484, we learned about the dangers of using a high proportion of debt financing faced by both General Motors (GM) and Lehman...
-
The cash flow statements for retailing giant Big-Box, Inc., spanning the period 2013-2016 are as follows: Answer the following questions using the information found in these statements: a. Does...
-
Is the price of a long-term (longer-maturity) bond more or less sensitive to changes in interest rates than that of a short-term bond? Why?
-
What are the features of a legal risk management plan?
-
What are residual powers? Concurrent powers?
-
Why have business enterprises adopted codes of conduct?
Study smarter with the SolutionInn App