[Utopia]

MCQ from Wiley:

Brown Corp., is a calendar year taxpayers, was organized and actively began operations on July 1,2011, and incurred the following costs:

Legal fees to obtain corporate charter $40,000

Commission paid to underwriter 25,000

Temporary director’s meeting 15,000

State incorporation fees 4,400

For 2011, what amount should Brown Corp. deduct for organization expenses?

A) $ 1,980

B) $ 2,814

C) $ 5,940

D) $ 6,812

My answer was $6,812 . But Wiley shows that then answer is $ 1,980.

Please advise.

Thanks.

[Anonymous]

$40,000 + 15,000 + 4,400 = 59,400.

$59,400/180 months (given as the time period which organizational expenditures can be deducted) = $330

$330 x 6 months in 2011 = $1,980

Remember…

Any costs associated with the issuance of stock are NOT deductible as organizational expenditures. This is why the $25,000 from the problem is not included.

The $5,000 deduction allowed in the first year has to be reduced dollar for dollar by any amount over $50k. You will have to do the calculation for amounts from $50,001 to $54,999. For organizational expenses of $55,000 or more, you can't take any of the $5,000 deduction in the first year. Instead, you have to take the entire amount ratably over 180 months.

[Utopia]

Thanks apbandj !

[Anonymous]

Since the above was answered, here's another (no need to make a new thread!)

Mosh, a sole proprietor, uses the cash basis of accounting. At the beginning of the current year, accounts receivable were $25,000. During the year, Mosh collected $100,000 from customers. At the end of the year, accounts receivable were $15,000. What was Mosh’s gross taxable income for the current year?

Answer: $100,000

I picked $110,000. Why would this not be the case? The question doesn't specify if the $10,000 decrease in A/R ($10k cash received) is included in the $100,000. Is this just a bad question, or have I gone mad?

[kts1010]

Since he is a cash basis tax payer he would only recognize when cash is received. So since he collected 100,000 this year that is his gross income. If you were an accrual basis tax payer it would be 90,000 since you would have said the 10,000 decrease in accounts receivable was recognized in the year the amount owed was performed.

I hope this helps.

AUD - 08/20/12 - 82
REG - 10/30/12 - 82
FAR - 01/05/13 - 80
BEC - 04/15/13 - 84

[Anonymous]

So you're saying that the $10,000 decrease in A/R is included in the $100,000 cash received?

[kts1010]

Yep that is correct, since 10,000 of the cash that was received just went to lower the AR. The whole AR thing is just in there to confuse you, it has no effect on a cash basis tax payer. Of course like I said in my previous post if it was an accrual basis tax payer it would make a difference.

AUD - 08/20/12 - 82
REG - 10/30/12 - 82
FAR - 01/05/13 - 80
BEC - 04/15/13 - 84

[Author]

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