ACC 100 Chapter 2: Chapter 2 - Student Copy - 2015 09 28

Related to tax

Facts:

1. Paul and Jon are partners in a small successful restaurant. They want to expand but need a second location. They think their business has a FMV of $2,000,000 (and has a basis of $500,000 to Paul and a basis of $250,000 to Jon). The business is currently an LLC.

2. Jason is a real estate broker and investor. He normally buys real estate and sells it quickly. He is fully licensed as a real estate broker in Texas. Jason has a vacant lot that he paid $1,200,000 last year. The FMV is currently $1,000,000.

3. No one wants gain from this transaction this year.

4. Paul and Jon approach Jason about the following business proposition: the restaurant and the land are contributed to a new corporation. Each gets 1/3 of the stock. Client: does this work from an economic standpoint?

5. Jason is not sure he likes that idea and instead offers the following (this occurs when Jason is added to the new Corporation):

A. The corporation will distribute out to Jason a part of the parking lot (of the old location). The FMV is $200,000 and the basis to the corp is $100,000. Jason will contribute the new land for stock. Client: what is the amount of stock should Jason get in the corp?

6. If #5 does not work- then Jason would take $200,000 in convertible preferred stock and $200,000 in value of the parking lot land (see #5) and $600,000 in cash.

7. Keep in mind Jason wants to own part of the restaurant- he thinks it will be successful.

Assignment:

What is the income tax consequences idea #4?

What is the income tax consequences idea #5?

What is the income tax consequences idea #6?

Is there a better economic structure that will give the three people the result they desire? If so what it is and defend the idea.

Computers R Us Inc. began their business in January 1, 2015 and recently lost their accountant. Thankfully, they have been able to hire a fine accounting/finance student from University. They have provided you with the unadjusted trial balance for Computers R Us Inc. as of 12/31/17. The previous accountant recorded all original entries involving cash, etc. during the year. However, at year-end the previous accountant would make all necessary adjusting/reclassification journal entries so that the principles of US GAAP were followed. Your task will be to create and record all necessary adjusting, correcting, and reclassification entries so that 2017 financial statements in accordance with US GAAP can be issued. The below information was discovered by reviewing contracts, agreements, correspondence and discussions with management.

1. On the “Adjusting Journal Entries” worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information. All information was provided to you as of 12/31/2017. (Round all numbers to the nearest dollar).

a. Unadjusted cash balance is Debit $218,000. Computers R Us does banking at three different financial institutions. The details are as follows:

What is the adjusting journal entry for this?

Sal Shirey is an owner of a small business. His company has recently borrowed a large amount of funds to finance the construction of a large building addition, as well as, the purchase of equipment and machinery. Shirey's banker requires him to submit quarterly financial statements so that he can monitor the financial health of his business. The bank has warned that if profit margins decline, the interest rate on the loan may need to be increased in order to reflect additional risk. Shirey knows that profit may decline this year. As he is preparing the year-end adjusting entries, Sal decides, for depreciation purposes, to treat all long-term asset purchases as though they occurr on the first day of the month following the month of purchase.

1. Is there an ethical issue with the implementation of this rule? If so, what is it?

2. When should depreciation first be recorded?

3. What impact will Shirey's approach to recording depreciation have on the financial statements?