Infomation for what we need to use! You are currently working at a mid-sized cer
ID: 2462979 • Letter: I
Question
Infomation for what we need to use!
You are currently working at a mid-sized certified public accounting firm. Your client is Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available in his 401(k) fund and he is thinking of using that money to open a used car business that will be located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business might make $300,000 in taxable income. Bob’s personal wealth including investments in land, stocks, and bonds is about $14,000,000. He reported an interest income of $20,000 and dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. Bob has hired your firm for professional advice regarding whether he should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. He is also considering transferring a possible 40% interest in his new business to his daughter Mandy, age 23 and single.
Describe the tax effect as a S corporation and the impact it will have on the client's personal tax return. Evaluate the economic impact on the client's personal returns based on being a S corporation.
A. Differentiate bettttween accrual accouting and cash basis. Based on the type of business and the client's accouting system, what is the imparct when revenue is recogniszed? Which option would you recommend for the client?
B. Based on the decision of accrual vs. cah basis, describe when revenue would be recognized on the sale of inventory and how the accrual reporting differs from cash basis.
C. Determine the economic impact on the client's financial situation. Based on your decision, determine the potential tax liability, keeping in mind appropriate internal Revenue Code and Treasury regulations.
D. Summarize the cash or accrual accounting method in relation to the selected business entity.
Explanation / Answer
A. Difference between accrual accouting and cash basis accounting
1. The main difference between these two forms of accounting goes right back to timing. Of course, timing has a partner here. It is called revenue recognition. Cash basis only records revenue when cash is received, and not a moment before. It also only recognizes an expense when cash has been paid out. So, even if a bill is sitting on your desk, if it has not been paid, it is not considered an expense in cash basis accounting - at least not until you write a check to pay that bill.
In the accrual basis, revenue is recognized when it is earned and not when it is received. Expenses are recognized when bills are received regardless of when they're paid.
2. Another pretty important difference in these two forms of accounting is how well cash is tracked. Cash-basis accounting does an excellent job of tracking cash flow because it records the inflows and outflows only when they occur. However, it does a horrible job of matching revenues and expenses in the accounting period that they occur.
Accrual basis does an excellent job of matching revenues and expenses and a poor job of tracking cash flow because it recognizes income before it is received and expenses before they're paid.
3. A third example of differences between these two types of accounting methods is this: in order for a company to use cash-basis accounting, it can't sell items using in-house charge accounts that would result in an account receivable. It must only accept cash, check or credit cards as payment. Under the accrual basis of accounting, the company does have accounts receivables.