Posted: October 20th, 2022

Chapter 8: Business Income, Deductions, and Accounting Methods

33.(LO5)Explain why Congress enacted the UNICAP rules and describe the burdens these rules place on taxpayers.34.(LO5)Compare and contrast financial accounting rules with the tax rules under UNICAP (§263A). Explain whether the UNICAP rules tend to accelerate or defer income relative to the financial accounting rules.35.(LO5)Compare and contrast the tests for accruing income and those for accruing deductions for tax purposes.36.(LO5)Compare and contrast when taxpayers are allowed to deduct amounts for warranties provided by others to the taxpayer and when taxpayers are allowed to deduct expenses associated with warranties they provide to others.37.(LO5)Describe when economic performance occurs for the following expenses:Worker’s compensationRebates and refundsInsurance, warranties, and service contracts providedtothe businessTaxes38.(LO5)On December 31 of the current year, a taxpayer prepays an advertising company to provide advertising services for the next 10 months. Using the 12-month rule and the economic performance rules, contrast when the taxpayer would be able to deduct the expenditure if the taxpayer uses the cash method of accounting versus if the taxpayer uses the accrual method of accounting.39.(LO5)Compare and contrast how bad debt expense is determined for financial accounting purposes and how the deduction for bad debts is determined for accrual-method taxpayers. How do cash-method taxpayers determine their bad debt expense for accounts receivable?40.(LO5)Describe the related-party limitation on accrued deductions. What tax savings strategy is this limitation designed to thwart?41.(LO5)What are the relative advantages of the cash and accrual methods of accounting?42.(LO5)Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.43.(LO5)Describe why the IRS might be skeptical of permitting requests for changes in accounting method without a good business purpose?44.(LO5)What is a §481 adjustment and what is its purpose?Problems45.(LO1)Michael hired his brother’s firm to provide accounting services to his business. During the current year, Michael paid his brother’s firm $82,000 for services even though other firms were willing to provide the same services for $40,000. How much of this expenditure, if any, is deductible as an ordinary and necessary business expenditure?46.(LO1, LO2)Indicate the amount (if any) that Michael can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution.From time to time, Michael rents a dump truck for his business. While hauling gravel to a job site, Michael was stopped for speeding. He paid a fine of $125 for speeding and a fine of $80 for carrying an overweight load.Michael paid a part-time employee $750 to drive his rented dump truck. Michael reimbursed the employee $35 for gasoline for the truck.Michael gave a member of the city council a new watch, which cost $200. He hopes that the city councilman will “throw” some contracts to his business.47.(LO1, LO2)Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution.Josh borrowed $50,000 from the First State Bank using his business assets as collateral. He used the money to buy City of Blanksville bonds. Over the course of a year, Josh paid interest of $4,200 on the borrowed funds, but he received $3,500 of interest on the bonds.Josh purchased a piece of land for $45,000 in order to get a location to expand his business. He also paid $3,200 to construct a new driveway for access to the property.This year Josh paid $15,000 to employ the mayor’s son in the business. Josh would typically pay an employee with these responsibilities about $10,000 but the mayor assured Josh that after his son was hired, some city business would be coming his way.Josh paid his brother, a mechanic, $3,000 to install a robotic machine for Josh’s business. The amount he paid to his brother is comparable to what he would have paid to an unrelated party to do the same work. Once the installation was completed by his brother, Josh began calibrating the machine for operation. However, by the end of the year, he had not started using the machine in his business.48.(LO2)Ralph invited a potential client to dinner and the theatre. Ralph paid $250 for the dinner and $220 for the theatre tickets in advance. They first went to dinner and then they went to the theatre.What amount can Ralph deduct if, prior to the dinner, he met with the potential client to discuss future business prospects?What amount can Ralph deduct if he and the client only discussed business during the course of the dinner?What amount can Ralph deduct if he and the potential client tried to discuss business during the course of the theatre performance but did not discuss business at any other time?What amount can Ralph deduct if the potential client declined Ralph’s invitation, so Ralph took his accountant to dinner and the theatre to reward his accountant for a hard day at work? At dinner, they discussed the accountant’s workload and upcoming assignments.49.(LO2)Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses: $250 fee to register for the conference, $300 per night for three night’s lodging, $200 for meals, and $150 for cab fare.What amount of the travel costs can Melissa deduct as business expenses?Suppose that while Melissa was on the coast, she also spent two days sightseeing the national parks in the area. To do the sightseeing, she paid $1,000 for transportation, $800 for lodging, and $450 for meals during this part of her trip, which she considers personal in nature. What amount of the travel costs can Melissa deduct as business expenses?Suppose that Melissa made the trip to San Francisco primarily to visit the national parks and only attended the business conference as an incidental benefit of being present on the coast at that time. What amount of the travel costs (airfare) can Melissa deduct as business expenses?Suppose that Melissa’s permanent residence and business was located in San Francisco. She attended the conference in San Francisco and paid $250 for the registration fee. She drove 100 miles over the course of three days and paid $90 for parking at the conference hotel. In addition, she spent $150 for breakfast and dinner over the three days of the conference. She bought breakfast on the way to the conference hotel and she bought dinner on her way home each night from the conference. What amount of the travel costs can Melissa deduct as business expenses?50.(LO2)Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is she allowed to deduct in each of the following alternative scenarios?Her trip was entirely for personal purposes.On the trip, she spent eight days on personal activities and two days on business activities.On the trip, she spent eight days on business activities and two days on personal activities.Her trip was entirely for business purposes.51.(LO2)Ryan is self-employed. This year Ryan used his personal auto for several long business trips. Ryan paid $1,500 for gasoline on these trips. His depreciation on the car if he was using it fully for business purposes would be $3,000. During the year, he drove his car a total of 12,000 miles (a combination of business and personal travel).Ryan can provide written documentation of the business purpose for trips totaling 3,000 miles. What business expense amount can Ryan deduct (if any) for these trips?Ryan estimates that he drove approximately 1,300 miles on business trips, but he can only provide written documentation of the business purpose for trips totaling 820 miles. What business expense amount can Ryan deduct (if any) for these trips?52.(LO1, LO2)Christopher is a cash-method, calendar-year taxpayer, and he made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming he has a 30 percent marginal tax rate..phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>$500 fine for speeding while traveling to a client meeting.$240 of interest on a short-term loan incurred in September and repaid in November. Half of the loan proceeds were used immediately to pay salaries and the other half was invested in municipal bonds until November.$600 for office supplies in May of this year. He used half of the supplies this year and he will use the remaining half by February of next year.$450 for several pair of work boots. Christopher expects to use the boots about 80 percent of the time in his business and the remainder of the time for hiking. Consider the boots to be a form of clothing.53.(LO2)Heather paid $15,000 to join a country club in order to meet potential clients. This year she paid $4,300 in greens fees when golfing with clients. Under what circumstances, if any, can Heather deduct the $15,000 cost of country club dues and the costs of the golf played with clients?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>54.(LO1, LO2)Assume Sarah is a cash-method, calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she has a 25 percent marginal tax rate..phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>$2,000 payment for next year’s property taxes on her place of business.$800 to reimburse the cost of meals incurred by employees while traveling for the business.$1,200 for football tickets to entertain out-of-town clients during contract negotiations.$500 contribution to the mayor’s re-election campaign.55.(LO3)Renee manufactured and sold a “gadget,” a specialized asset used by auto manufacturers that qualifies for the domestic manufacturing deduction. Renee incurred $15,000 in direct expenses in the project, which includes $2,000 of wages Renee paid to employees in the manufacturing of the gadget. What is Renee’s domestic manufacturing deduction for the gadget in each of the following alternative scenarios?Renee sold the gadget for $25,000 and she reported AGI of $75,000 before considering the manufacturing deduction.Renee sold the gadget for $25,000 and she reported AGI of $5,000 before considering the manufacturing deduction.Renee sold the gadget for $40,000 and she reported AGI of $50,000 before considering the manufacturing deduction.56.(LO3)Andrew is considering starting a business of constructing and selling prefabricated greenhouses. There are three very different methods to constructing these greenhouses, and each method results in different revenue and cost projections. Below, Andrew has projected the qualifying revenue and costs for each method. The selling price includes qualifying receipts. The allocable expenses include wages and allocable expenses are included in total costs..phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>MethodSelling PriceQualifying ReceiptsTotal CostAllocable ExpensesAllocable Wages#1$13,000$ 9,000$6,500$2,500$2,000#214,0009,0007,4005,5001,500#315,00014,0008,6002,0001,000Estimate the tax benefit from domestic manufacturing deduction for each construction technique. You may assume that Andrew has sufficient AGI to utilize the deduction.Which construction technique should Andrew use if his marginal tax rate is 30 percent?57.(LO3)This year Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation expense for the equipment.After the accident, Amy had the choice of repairing the equipment for $1,800 or selling the equipment to a junk shop for $300. Amy sold the equipment. What amount can Amy deduct for the loss of the equipment?After the accident, Amy repaired the equipment for $800. What amount can Amy deduct for the loss of the equipment?After the accident, Amy could not replace the equipment so she had the equipment repaired for $2,300. What amount can Amy deduct for the loss of the equipment?58.(LO3)Stephen operates a small hardware store on the cash method. On July 1 of this year, Stephen purchased a “key-employee” term-life policy that insures the life of his best store clerk. The policy cost Stephen $1,220 and will pay him a $40,000 death benefit if his clerk passes away any time during the next 12 months.What amount of the $1,220 life insurance policy premium can Stephen deduct this year?Suppose that Stephen purchased the life insurance policy on the clerk’s life but allowed the clerk to name the clerk’s wife as the beneficiary. What amount of the life insurance policy can Stephen deduct this year?59.(LO5)Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services at the first of each month. The bills are due by the end of the month, and typically 70 percent of the bills are paid on time and 98 percent are paid within 60 days..phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/planning.gif”>Suppose that Nicole is expecting a 2 percent reduction in her marginal tax rate next year. Ignoring the time value of money, estimate the tax savings for Nicole if she postpones mailing of bills for December until January 1 of next year.Describe how the time value of money affects your calculations.Would this tax savings strategy create any additional business risks? Explain.60.(LO5)Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cash-method taxpayer and (2) he is an accrual-method taxpayer.$1,000 deposit from the Ladies’ Club, which wants to lease a trailer. The club will receive the entire deposit back when the trailer is returned undamaged.$800 from the Ladies’ Club for leasing the trailer from December of this year through March of next year ($200 per month).$300 lease payment received from the Men’s Club this year for renting Jeremy’s trailer last year. Jeremy billed the club last year but by year-end of last year he determined that the Men’s Club would never pay him, so he was surprised when he received the check.61.(LO5)Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer. In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year. The contract specifies that Brown Thumb will receive $4,000 in October as a down payment for these services and it will receive the remaining $10,000 in January of next year when the city budget is reviewed.How much income from this $14,000 contract will Brown Thumb recognize in the current year? Explain.How much income from this $14,000 contract will Brown Thumb recognize in the current year if it uses the cash method of accounting?Suppose that the total amount to be paid under the contract with the city is estimated at $14,000 but may be adjusted to $12,000 next year during the review of the city budget. What amount from the contract, if any, should Brown Thumb recognize as income this year? Explain.Suppose that in addition to the basic contract, Brown Thumb will be paid an additional $3,000 if its city landscape design wins the annual design competition next year. Should Brown Thumb accrue a $3,000 revenue this year? Why or why not?62.(LO5)In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin deduct in year 0 in each of the following alternative scenarios?The policy covers the business property from April 1 of year 0 through March 31 of year 1.The policy begins on February 1 of year 1 and extends through January 31 of year 2.Assume Justin paid $6,000 for a 24-month policy that covers from April 1, year 0 through March 31, year 2.Assume that instead of paying an insurance premium, Justin paid $4,800 to rent his business property from April 1 of year 0 through March 31 of year 1.63.(LO5)Tiffany decided to promise her full-time employees a two-week paid vacation. When, if ever, may Tiffany deduct the expense for the vacation pay? {Hint: See Reg. §1.404b.-1T, Q&A-2(b)(1).}.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>Assume Tiffany’s business uses the cash method of accounting.Assume Tiffany’s business uses the accrual method of accounting.64.(LO5)On April 1 of year 0 Stephanie received a $9,000 payment for full payment on a three-year service contract (under the contract Stephanie is obligated to provide advisory services for the next three years).What amount of income should Stephanie recognize in year 0 if she uses the accrual method of accounting (she recognized $2,250 for financial accounting purposes)?What amount of income will Stephanie recognize in year 1 if she uses the accrual method of accounting?What amount of income will Stephanie recognize in year 2 if she uses the accrual method of accounting?What amount of income will Stephanie recognize in year 0 if she recognizes $5,000 of income from the contract for financial statement purposes?65.(LO5)In October of year 0, Janine received a $6,000 payment from a client for 25 months of security services she will provide starting on November 1 of year 0. This amounts to $240 per month.When must Janine recognize the income from the $6,000 advance payment for services if she uses the cash method of accounting?When must Janine recognize the income from the $6,000 advance payment for services if she uses the accrual method of accounting?Suppose that instead of services, Janine received the payment for a security system (inventory) that she will deliver and install in year 2. When would Janine recognize the income from the advance payment for inventory sale if she uses the accrual method of accounting and she uses the deferral method for reporting income from advance payments? For financial accounting purposes, she reports the income when the inventory is delivered.Suppose that instead of services, Janine received the payment for the delivery of inventory to be delivered next year. When would Janine recognize the income from the advance payment for sale of goods if she uses the accrual method of accounting and she uses the full-inclusion method for advance payments?66.(LO5)Nicole’s business uses the accrual method of accounting and accounts for inventory with specific identification. In year 0, Nicole received a $4,500 payment with an order for inventory to be delivered to the client early next year. Nicole has the inventory ready for delivery at the end of year 0 (she purchased the inventory in year 0 for $2,300).When does Nicole recognize the $2,200 of gross profit ($4,500 revenue minus $2,300 cost of the inventory) if she uses the full-inclusion method?When does Nicole recognize the $2,200 of gross profit from the inventory sale if she if she uses the deferral method?How would Nicole account for the inventory-related transactions if she uses the cash method of accounting and her annual sales are usually less than $100,000?How would Nicole account for the inventory-related transactions if she uses the cash method of accounting and her annual sales are usually over $2,000,000 per year?67.(LO5)This year Amber opened a factory to process and package landscape mulch. At the end of the year, Amber’s accountant prepared the following schedule for allocating manufacturing costs to the mulch inventory, but her accountant is unsure of what costs need to be allocated to the inventory under UNICAP. Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process.CostsTax InventoryMaterial:Mulch and packaging$ 5,000?Administrative supplies250?Salaries:Factory labor12,000?Sales & advertising3,500?Administration5,200?Property taxes:Factory4,600?Offices2,700?Depreciation:Factory8,000?Offices1,500?At the end of the year, Amber’s accountant indicated that the business had processed 10,000 bags of mulch but only 1,000 bags remained in the ending inventory. What is Amber’s tax basis in her ending inventory after applying the UNICAP rules to allocate indirect costs to inventory? (Assume direct costs are allocated to inventory according to the level of ending inventory. In contrast, indirect costs are first allocated by time spent and then according to level of ending inventory.)Under what conditions could Amber’s business avoid having to apply UNICAP to allocate indirect costs to inventory for tax purposes?68.(LO5)Suppose that David adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).WidgetPurchase DateDirect CostOther CostsTotal Cost#1August 15$2,100$100$2,200#2October 30$2,200$150$2,350#3November 10$2,300$100$2,400In late December, David sold widget #2 and next year David expects to purchase three more widgets at the following estimated prices:WidgetPurchase DateEstimated Cost#4Early spring$2,600#5Summer$2,260#6Fall$2,400What cost of goods sold and ending inventory would David record if he elects to use the LIFO method this year?If David sells two widgets next year, what will be his cost of goods sold and ending inventory next year under the LIFO method?How would you answer (a) and (b) if David had initially selected the first-in, first-out (FIFO) method instead of LIFO?Suppose that David initially adopted the LIFO method, but wants to apply for a change to FIFO next year. What would be his §481 adjustment for this change, and in what year(s) would he make the adjustment?69.(LO5)On November 1 of year 0, Jaxon borrowed $50,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $4,500 relating to the 12-month period from November of year 0 through October of year 1.How much interest, if any, can Jaxon deduct in year 0 if his business uses the cash method of accounting for tax purposes?How much interest, if any, can Jaxon deduct in year 0 if his business uses the accrual method of accounting for tax purposes?70.(LO5)Matt has contracted with Apex Services to provide routine repair and maintenance services for several pieces of his business equipment. On November 1 of year 0, Matt paid $2,000 for the repairs that he expects will begin in early March of year 1.What amount of the cost of the repairs can Matt deduct in year 0 if he uses the cash method of accounting for his business?What amount of the cost of the repairs can Matt deduct in year 0 if he uses the accrual method of accounting for his business?What amount of the cost of the repairs can Matt deduct in year 0 if he uses the accrual method and he expects the repairs to be done by early February?What amount of the cost of the repairs can Matt deduct in year 0 if he uses the cash method of accounting and he expects the repairs to be done by early February?71.(LO5)Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer. CC manufactures and sells electronic circuitry. On November 15, year 0, CC enters into a contract with Equip Corp (EC) that provides CC with exclusive use of EC’s specialized manufacturing equipment for the five-year period beginning on January 1 of year 1. Pursuant to the contract, CC pays EC $1,000,000 on December 30, year 0. How much of this $1,000,000 expenditure is CC allowed to deduct in year 0 and in year 1?72.(LO5)This year (year 0) Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract pays the consulting firm $1,500 for each instance that Elizabeth requests their Helpance. The contract also provides that Elizabeth only pays the consultants if its advice increases efficiency as measured 12 months from the date of service. This year Elizabeth requested advice on three occasions and she has not yet made any payments to the consultants.How much should Elizabeth deduct in year 0 under this service contract if she uses the accrual method of accounting?How much should Elizabeth deduct in year 0 under this service contract if she uses the cash method of accounting?73.(LO5)Travis is a professional landscaper. He provides his clients with a one-year (12-month) warranty for retaining walls he installs. In June of year 1, Travis installed a wall for an important client, Sheila. In early November, Sheila informed Travis that the retaining wall had failed. To repair the wall, Travis paid $700 cash for additional stone that he delivered to Sheila’s location. Travis also offered to pay a mason $800 to repair the wall. Due to some bad weather and the mason’s work backlog, the mason agreed to finish the work by the end of January of year 2. Even though Travis expected the mason to finish the project as agreed (end of January), Travis informed the mason that he would pay the mason the $800 when he completed the job.Assuming Travis is an accrual-method taxpayer, how much can he deduct in year 1 from these activities?Assuming Travis is a cash-method taxpayer, how much can he deduct in year 1 from these activities?74.(LO5)Adam elects the accrual method of accounting for his business. What amount of deductions does Adam recognize in year 0 for the following transactions?.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>.phoenix.edu/content/ebooks/9780073526966-taxation-of-individuals-and-business-entities-201/jcr:content/images/research.gif”>Adam guarantees that he will refund the cost of any goods sold to a client if the goods fail within a year of delivery. In December of year 0, Adam agreed to refund $2,400 to clients, and he expects to make payment in January of year 1.On December 1 of year 0, Adam paid $480 for a one-year contract with CleanUP Services to clean his store. The agreement calls for services to be provided on a weekly basis.Adam was billed $240 for annual personal property taxes on his delivery van. Because this was the first time Adam was billed for these taxes, he did not make payment until January. However, he considers the amounts immaterial.75.(LO5)Rebecca is a calendar-year taxpayer who operates a business. She made the following business-related expenditures in December of year 0. Indicate the amount of these payments that she may deduct in year 0 under both the cash method of accounting and the accrual method of accounting.$2,000 for an accountant to evaluate the accounting system of Rebecca’s business. The accountant spent three weeks in January of year 1 working on the Assessment.$2,500 for new office furniture. The furniture was delivered on January 15.$3,000 for property taxes payable on her factory.$1,500 for interest on a short-term bank loan relating to the period from November 1 through March 31.76.(LO5)BCS Corporation is a calendar-year, accrual-method taxpayer. BCS was formed and started its business activities on January 1, year 0. It reported the following information for year 0. Indicate BCS’s deductible amount for year 0 in each of the following alternative scenarios.BCS provides two-year warranties on products it sells to customers. For its year 0 sales, BCS estimated and accrued $200,000 in warranty expense for financial accounting purposes. During year 0, BCS actually spent $30,000 repairing its product under the warranty.BCS accrued an expense for $50,000 for amounts it anticipated it would be required to payunderthe worker compensation act. During year 0, BCS actually paid $10,000 for workers’ compensation–related liabilities.In June of year 0, a display of BCS’s product located in its showroom fell on and injured a customer. The customer sued BCS for $500,000. The case is scheduled to go to trial next year. BCS anticipates that it will lose the case and accrued a $500,000 expense on its financial statements.Assume the same facts as in (c) except that BCS was required to pay $500,000 to a court-appointed escrow fund in year 0. If BCS loses the case in year 1, the money from the escrow fund will be transferred to the customer suing BCS.On December 1 of year 0, BCS acquired equipment from Equip Company. As part of the purchase, BCS signed a warranty agreement with Equip so that Equip would warranty the equipment for two years (from December 1 of year 0 through November 30 of year 2). The cost of the warranty was $12,000. BCS paid Equip for the warranty in January of year 1.77.(LO5)This year William provided $4,200 of services to a large client on credit. Unfortunately, this client has recently encountered financial difficulties and has been unable to pay William for the services. Moreover, William does not expect to collect for his services for at least a year. William has “written off” the account and would like to claim a deduction for tax purposes.What amount of deduction for bad debt expense can William claim this year if he uses the accrual method?What amount of deduction for bad debt expense can William claim this year if he uses the cash method?78.(LO5)Dustin has a contract to provide services to Dado Enterprises. In November of year 0, Dustin billed Dado $10,000 for the services he rendered during the year. Dado is an accrual-method proprietorship that is owned and operated by Dustin’s father.What amount of revenue must Dustin recognize in year 0 if Dustin uses the cash method and Dado remits payment for the services in December of year 0? What amount can Dado deduct in year 0?What amount of revenue must Dustin recognize in year 0 if Dustin uses the accrual method and Dado remits payment for the services in December of year 0? What amount can Dado deduct in year 0?What amount of revenue must Dustin recognize in year 0 if Dustin uses the cash method and Dado remits payment for the services in January of year 1? What amount can Dado deduct in year 0?What amount of revenue must Dustin recognize in year 0 if Dustin uses the accrual method and Dado remits payment for the services in January of year 1? What amount can Dado deduct in year 0?79.(LO5)Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,000 of the bill by the end of year 0. However, Nancy paid the remainder of the bill in year 1.How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the cash method of accounting? What amount can Nancy deduct in year 0 for the consulting services?How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the accrual method of accounting? What amount can Nancy deduct in year 0 for the consulting services?80.(LO5)Erin is considering switching her business from the cash method to the acc

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