Business (a calendar year C corporate taxpayer) has the following items of income and deduction for Year 10:

1. Sold inventory­ worth $800,000. Cost of Goods sold was $350,000. Inventory is a material income producing factor.
2. Received $100,000 for service income. The company provided $10,000 of these services in Year 10. It expects to provide $30,000 worth of services in each of Years 11 – 13.
3. Received $40,000 from a tenant of a commercial property investment in December of Year 10 in full payment of Year 11’s rent.
4. Paid $50,000 of employee salaries and $10,000 of deductible employee related taxes during Year 10.
5. The employees earned bonuses of $20,000. The deductible payroll taxes related to those bonuses were $4,000. Business expects to pay the bonuses and related taxes ½ on March 1 and ½ on May 15 of Year 11.
6. At the end of Year 10, the company estimates its remaining warranty expense related to this Year 10’s sales to be $15,000. It estimates that these amounts will be paid $3,000 per month for the first 5 months of Year 11.
7. During Year 10, the company was sued for product liability. At year end, the company is agreed to settle the case and estimates the settlement payment to be $500,000. It plans to pay out the settlement by July 1 of next year.
8. At the end of Year 9, the company prepaid its Year 10 insurance ($12,000). At the end of Year 10, the company prepaid its Year 11 insurance ($14,000).
9. The company paid $120,000 of general and administrative expenses during Year 10.
10. Business is wholly owned by a single individual (Mike). Business sold property (in an arms-length deal) to Mike and realized a $12,000 loss in Year
11. Mike does consulting work for Business. During December, Mike performed $20,000 of services. Mike billed Business in December. Business paid Mike on February 1, Year 11

Required:

1) Assume that Business is a cash method taxpayer. Compute its taxable income.

2) Assume that Business is an accrual method taxpayer. Compute its taxable income.

Answer rating: 100% (QA)

1 Assume that Business is a cash method taxpayer Compute its taxable income Income Sold inventory wo... View the full answer