Scott and Kourtney Smith are married and have been clients ofFootem and Filem, LLP (F&F) for the past few years. Kourtney isan elementary school teacher. Scott owns a real estate business,Smith Realty, which he operates as a sole proprietorship. InFebruary of this year, Scott was trying to sell a very expensivehome to a buyer with very little credit history. The largecommercial banks that Scottâs buyers normally use to obtainmortgages refused to issue a loan to this buyer. However, Scott wasdetermined to make this sale happen so he could collect a salescommission amounting to $50,000. Scott has a friend named LarryBelfort who is a loan officer at a small bank in Tuscaloosa,Alabama. After his buyer was denied credit by several largecommercial banks, Scott agreed to âsplitâ his commission 50/50 withLarry as long as Scottâs buyer could get a mortgage from the bankto complete the sale of the home. Larry agreed, but told Scott thatit would be illegal under Alabama law for him to accept the $25,000bribe. Instead, Larry asked that Scott donate the money to theUniversity of Alabama to establish a scholarship in Larryâs honor.Larry was already planning to donate $25,000 to the universityanyway, but this deal with Scott saved Larry the time and expenseof doing it himself. Based on the facts above, how much of the$25,000 donated to the University of Alabama, if any, can Scottdeduct for federal income tax purposes? In addition, how much ofthe $50,000 total sales commission must Scott recognize in grossincome for federal tax purposes? Assume you work for F&F andScott and Kourtney Smith are your clients. Prepare a brief researchmemo, complete with citations and analysis of primary authority, tosupport your conclusions. Remember that Scott and Kourtney are notprofessional tax preparers, so it is important that you explainyour position in a clear and concise manner that is not overlytechnical (i.e., do not copy and paste excerpts from primaryauthorities and call it a day).
Scott and Kourtney Smith are married and have been clients ofFootem and Filem, LLP (F&F) for the past few years. Kourtney isan elementary school teacher. Scott owns a real estate business,Smith Realty, which he operates as a sole proprietorship. InFebruary of this year, Scott was trying to sell a very expensivehome to a buyer with very little credit history. The largecommercial banks that Scottâs buyers normally use to obtainmortgages refused to issue a loan to this buyer. However, Scott wasdetermined to make this sale happen so he could collect a salescommission amounting to $50,000. Scott has a friend named LarryBelfort who is a loan officer at a small bank in Tuscaloosa,Alabama. After his buyer was denied credit by several largecommercial banks, Scott agreed to âsplitâ his commission 50/50 withLarry as long as Scottâs buyer could get a mortgage from the bankto complete the sale of the home. Larry agreed, but told Scott thatit would be illegal under Alabama law for him to accept the $25,000bribe. Instead, Larry asked that Scott donate the money to theUniversity of Alabama to establish a scholarship in Larryâs honor.Larry was already planning to donate $25,000 to the universityanyway, but this deal with Scott saved Larry the time and expenseof doing it himself. Based on the facts above, how much of the$25,000 donated to the University of Alabama, if any, can Scottdeduct for federal income tax purposes? In addition, how much ofthe $50,000 total sales commission must Scott recognize in grossincome for federal tax purposes? Assume you work for F&F andScott and Kourtney Smith are your clients. Prepare a brief researchmemo, complete with citations and analysis of primary authority, tosupport your conclusions. Remember that Scott and Kourtney are notprofessional tax preparers, so it is important that you explainyour position in a clear and concise manner that is not overlytechnical (i.e., do not copy and paste excerpts from primaryauthorities and call it a day).
Unlock all answers
Related questions
Using the scenario provided, your textbook, and at least one outside source discuss whether you agree with the internâs decision to use an absorption format for her segmented income statement and her decision to allocate the common fixed expenses to the Commercial and Residential segments? Why or why not? Write in complete sentences and included proper APA citations for each of your sources used in your post.
Discussion
Toxaway Company is a merchandiser that segments its business into two divisionsâCommercial and Residential. The companyâs accounting intern was asked to prepare segmented income statements that the companyâs divisional managers could use to calculate their break-even points and make decisions. She took the prior monthâs companywide income statement and prepared the absorption format segmented income statement shown below:
| Total Company | Commercial | Residential | |
| Sales | $750,000 | $250,000 | $500,000 |
| Cost of goods sold | 500,000 | 140,000 | ââ 360,000 |
| Gross margin | 250,000 | 110,000 | 140,000 |
| Selling and administrative expenses | 240,000 | 104,000 | 136,000 |
| Net operating income | $ 10,000 | $ 6,000 | $âââ 4,000 |
In preparing these statements, the intern determined that Toxawayâs only variable selling and administrative expense is a 10% sales commission on all sales. The companyâs total fixed expenses include $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses that would be avoided if the Residential segment is dropped.
Discussion
Toxaway Company is a merchandiser that segments its business into two divisionsâCommercial and Residential. The companyâs accounting intern was asked to prepare segmented income statements that the companyâs divisional managers could use to calculate their break-even points and make decisions. She took the prior monthâs companywide income statement and prepared the absorption format segmented income statement shown below:
| Total Company | Commercial | Residential | |
| Sales | $750,000 | $250,000 | $500,000 |
| Cost of goods sold | 500,000 | 140,000 | ââ 360,000 |
| Gross margin | 250,000 | 110,000 | 140,000 |
| Selling and administrative expenses | 240,000 | 104,000 | 136,000 |
| Net operating income | $ 10,000 | $ 6,000 | $âââ 4,000 |
In preparing these statements, the intern determined that Toxawayâs only variable selling and administrative expense is a 10% sales commission on all sales. The companyâs total fixed expenses include $72,000 of common fixed expenses that would continue to be incurred even if the Commercial or Residential segments are discontinued, $55,000 of fixed expenses that would be avoided if the Commercial segment is dropped, and $38,000 of fixed expenses that would be avoided if the Residential segment is dropped.
Toxaway Company is a merchandiser that segments its businessinto two divisionsâCommercial and Residential. The companyâsaccounting intern was asked to prepare segmented income statementsthat the companyâs divisional managers could use to calculate theirbreak-even points and make decisions. She took the prior monthâscompanywide income statement and prepared the absorption formatsegmented income statement shown below: |
| Total Company | Commercial | Residential | |||||||
| Sales | $ | 915,000 | $ | 305,000 | $ | 610,000 | |||
| Cost of goodssold | 585,600 | 152,500 | 433,100 | ||||||
| Gross margin | 329,400 | 152,500 | 176,900 | ||||||
| Selling andadministrative expenses | 284,000 | 126,000 | 158,000 | ||||||
| Net operatingincome | $ | 45,400 | $ | 26,500 | $ | 18,900 | |||
In preparing these statements, the intern determined thatToxawayâs only variable selling and administrative expense is a 10%sales commission on all sales. The companyâs total fixed expensesinclude $70,500 of common fixed expenses that would continue to beincurred even if the Commercial or Residential segments arediscontinued, $50,000 of fixed expenses that would be avoided ifthe Residential segment is dropped, and $72,000 of fixed expensesthat would be avoided if the Commericial segment is dropped. |
| Required: |
| 1. | Do you agree with the internâs decision to use an absorptionformat for her segmented income statement? | ||||
|
| 2-a. | Based on the internâs segmented income statement, can youdetermine how she allocated the companyâs common fixed expenses tothe Commercial and Residential segments? |
| 2-b. | Do you agree with her decision to allocate the common fixedexpenses to the Commercial and Residential segments? | ||||
|
| 3. | Redo the internâssegmented income statement using the contribution format. |
| 4. | Compute the companywide break-even point in dollar sales?(Round intermediate calculations to 3 decimal places andfinal answer to the nearest whole dollar amount.) |
| 5. | Compute the break-even point in dollar sales for the CommercialDivision and for the Residential Division. (Round CM ratioto 2 decimal places and final answers to the nearest whole dollaramount.) |
| 6. | Assume the company decided to pay its sales representatives inthe Commercial and Residential Divisions a total monthly salary of$22,000 and $44,000, respectively, and to lower its companywidesales commission percentage from 10% to 5%. Calculate the newbreak-even point in dollar sales for the Commercial Division andthe Residential Division. (Round CM ratio to 2 decimalplaces and final answers to the nearest whole dollaramount.) |
