THE ACCOUNTING CYCLE

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THE ACCOUNTING CYCLE

COMPREHENSIVE PROBLEM 1: THE ACCOUNTING CYCLE

Bob Night opened, “The General’s Favorite Fishing Hole.”  The fishing camp is open from April through September and attracts many famous college basketball coaches during the off-season.  Guests typically register for one week, arriving on Sunday afternoon and returning home the following Saturday afternoon.  The registration fee includes room and board, the use of fishing boats, and professional instruction in fishing techniques.  The chart of accounts for the camping operations is provided below.

The General’s Favorite Fishing Hole: Chart of Accounts

 

Assets   Revenues  
101 Cash 401 Registration Fees
142 Office Supplies    
144 Food Supplies Expenses  
145 Prepaid Insurance 511 Wages Expense
181 Fishing Boats 521 Rent Expense
181.1 Accum. Depr.–Fishing Boats 523 Office Supplies Expense
    524 Food Supplies Expense
Liabilities   525 Telephone Expense
202 Accounts Payable 533 Utilities Expense
219 Wages Payable 535 Insurance Expense
    536 Postage Expense
Owner’s Equity 542 Depr. Exp.–Fishing Boats
311 Bob Night, Capital    
312 Bob Night, Drawing    
313 Income Summary    

 

The following transactions took place during April 2015

Day Trans# Desc

1 1101 Night invested cash in business, $90,000.

1 1102 Paid insurance premium for six-month camping season, $9,000.

2 1103 Paid rent for lodge and campgrounds for the month of April, $40,000.

2 1104 Deposited registration fees, $35,000.

2 1105 Purchase ten fishing boats on account for $60,000. The boats have estimated useful lives of five years, at which time they will be donated to a local day camp. Arrangements were made to pay for the boats in July.

3 1106 Purchase food supplies from Acme Super Market on account, $7,000.

5 1107 Purchase office supplies from Gordon Office Supplies on account, $500.

7 1108 Deposited registration fee, $38,600.

10 1109 Purchased food supplies from Acme Super Market on account, $8,200

10 1110 Paid wages to fishing guides, $10,000

14 1111 Deposited registration fees, $30,500

16 1112 Purchased food supplies from Acme Super Market on account, $9,000

17 1113 Paid wages to fishing guides, $10,000

18 1114 Paid postage, $150.

21 1115 Deposited registration fees, $35,600

24 1116 Purchased food supplies from Acme Super Market on account, $8,500

24 1117 Paid wages to fishing guides, $10,000

28 1118 Deposited registration fees, $32,000.

29 1119 Paid wages to fishing guides, $10,000

30 1120 Purchased food supplies from Acme Super Market on account, $6,000.

30 1121 Paid Acme Super market on account, $32,700.

30 1122 Paid utilities bill, $2,000.

30 1123 Paid telephone bill, $1,200.

30 1124 Bob Night withdrew cash for personal use, $6,000.

 

 

 

Adjustment information for the end of April is provided below.

 

Office supplies remaining on hand, $100.

Food supplies remaining on hand, $8,000.

Insurance expired during the month of April, $1,500.

Depreciation on the fishing boats for the month of April, $1,000.

Wages earned, but not yet paid, at the end of April, $500.

 

Required:

Enter the transactions in a general journal. Enter transactions from April 1-5 on pages 1, April 7-18 on page 2, April 21-29 and the first two entries for April 30 on page 3, and the remaining entries for April 30 on page 4.

Post the entries to the general ledger.(if you are not using the working papers that accompany this text, you will need to enter the account titles and account numbers in the general leger accounts).

Prepare a trial balance on a work sheet.

Complete the work sheet.

Journalize the adjusting entries (page 5)

Post the adjusting entries to the general ledger.

Prepare the income statement.

Prepare the statement of owner’s equity

Prepare the balance sheet.

Journalize the closing entries (page 5 and 6)

Post the closing entries to the general ledger.

Prepare a post-closing trial balance.

COMPREHENSIVE PROBLEM 1, PERIOD 2: THE ACCOUNTING CYCLE

During the month of May 2015, The General’s Favorite Fishing Hold engaged in the following transactions.  These transactions required an expansion of the chart of accounts as showing below

 

The General’s Favorite Fishing Hole

 

Assets   Revenues  
101 Cash 401 Registration Fees
122 Accounts Receivable 404 Vending Revenue
142 Office Supplies    
144 Food Supplies Expenses  
145 Prepaid Insurance 511 Wages Expense
146 Prepaid Subscriptions 512 Advertising Expense
161 Land 521 Rent Expense
171 Building 523 Office Supplies Expense
171.1 Accum. Depr.–Buildings 524 Food Supplies Expense
181 Fishing Boats 525 Telephone Expense
181.1 Accum. Depr.–Fishing Boats 533 Utilities Expense
182 Surround Sound System 535 Insurance Expense
182.1 Accum. Depr.–Surround Sound Sys. 536 Postage Expense
183 Big Screen TV 537 Repair Expense
183.1 Accum. Depr.–Big Screen TV 540 Depr. Exp.–Buildings
    541 Depr. Exp.–Surround Sound Sys.
Liabilities   542 Depr. Exp.–Fishing Boats
202 Accounts Payable 543 Depr. Exp.–Big Screen TV
219 Wages Payable 546 Satellite Programming. Exp.
    548 Subscriptions Expense
Owner’s Equity    
311 Bob Night, Capital    
312 Bob Night, Drawing    
313 Income Summary    

 

The following transactions took place during May 2015

Day Trans# Desc

1 2101 In order to provide snacks for guests on a 24 hour basis, Night signed a contract with Snack Attack.  Snack Attack will install vending machines with food and drinks and pay a 10% commission on all sales.  Estimated payments are made at the beginning of each month.  Night received a check for $200, the estimated commission on sales for May.

2 2102 Night purchased a surround sound system and big screen TV with a Digital Satellite System for the guest lounge.  The surround sound system cost $3,600 and has an estimated useful life of 5 years, and no salvage value.  The TV cost $8,000 and has an estimated useful life of 8 years, and a salvage value of $800.  Night paid cash for both items.

2 2103 Paid for May’s programming on the new Digital Satellite System, $125.

3 2104 Night’s office manager returned $100 worth of office supplies to Gordon Office Supply.  Night received a $100 reduction in our account with Gordon.

3 2105 Deposited registration fees, $52,700

3 2106 Paid rent for lodge and campgrounds for the month of May, $40,000.

3 2107 In preparation for the purchase of a nearby campground, Night invested an additional $600,000.

4 2108 Paid Gordon Office Supply on account, $400.

4 2109 Purchased the assets of a competing business and paid cash for the following: land $100,000, lodge $530,000 and fishing boats $9,000.  The lodge has a remaining useful life of 50 years and a $50,000 salvage value.  The boats have remaining lives of 5 years and zero salvage value.

5 2110 Paid May’s insurance premium for the new camp, $1,000

5 2111 Purchased food supplies from Acme Super Market on account, $22,950.

5 2112 Purchased office supplies from Gordon Office Supplies on account, $1,200.

7 2113 Night paid $40 each for one-year subscriptions to Fishing Illustrated, Fishing Unlimited, and Fish Master.  The magazines are published monthly.

10 2114 Deposited registration fees, $62,750

13 2115 Paid wages to fishing guides, $30,000.  (Don’t forget wages payable.)

14 2116 A guest because ill and was unable to stay for the entire week.  A refund was issued in the amount of $1,000.

17 2117 Deposited registration fees, $63,000.

19 2118 Purchased food supplies from Acme Super Market on account, $18,400.

21 2119 Deposited registration fees, $63,400

23 2120 Paid $2,500 for advertising spots on National Sports Talk Radio

25 2121 Paid repair fee for damaged boat, $ 850.

27 2122 Paid wages to fishing guides, $30,000.

28 2123 Paid $1,800 for advertising spots on billboards.

29 2124 Purchased food supplies from Acme Super Market on account, $14,325.

30 2125 Paid utilities bill, $3,300

30 2126 Paid telephone bill, $1,800.

30 2127 Paid Acme Super Market on account, $47,350.

31 2128 Bob Night withdrew cash for personal use, $7,500.

 

Adjustment information at the end of May is provided below.

 

Total vending machine sales were $2,300 for the month of May.  A 10% commission is earned on these sales.

Straight-line depreciation is used for the 10 boats purchased on April 2nd for $60,000.  The useful life for these assets is 5 years and there is no salvage value.  A full month’s depreciation was taken in April on these boats.  Straight-line depreciation is also used for the two boats purchased in May.  Make one adjusting entry for all depreciation on the boats.

Straight line depreciation is used to depreciate the surround sound system.

Straight line depreciation is used to depreciate the big screen TV.

Straight line depreciation is used for the building purchased in May.

On April 2nd Night paid $9,000 for insurance during the six-month camping season.  May’s portion of this premium was used up during this month.

Night received his May issues of Fishing Illustrated, Fishing Unlimited, and Fish Master.

Office supplies remaining on hand, $150.

Food supplies remaining on hand, $5,925.

Wages earned, but not yet paid, at the end of May, $6,000.

 

Required:

Enter the above transactions in a general journal.  Enter transactions from May 1-4 on page 5, May 5-28 on page 6, and the remaining entries on page 7.  To save time and space, don’t enter descriptions for the journal entries.

Post the entries to the general ledger.  (If you are not using the working papers that accompany this text, you will need to enter the account titles, account numbers, and balances from April 30 in the general ledger accounts.)

Prepare a trial balance on a work sheet.

Complete the work sheet.

Journalize the adjusting entries on page 8 of the general journal.

Post the adjusting entries to the general ledger.

Prepare the income statement.

Prepare the statement of owner’s equity

Prepare the balance sheet.

Journalize the closing entries on page 9 of the general journal.

Post the closing entries to the general ledger.

Prepare a post-closing trial balance.

 

Possible Post-Closing Trial Balance (Unverified yet)

April 30, 20—

 

Account Acct.

No.

 Debit

Balance

 Credit

Balance
Cash 101 130,650  
Office Supplies 142 100  
Food Supplies 144 8,000  
Prepaid Insurance 145 7,500  
Fishing Boats 181 60,000  
Accumulated Depreciation–Fishing Boats 181.1   1,000
Accounts Payable 202   66,500
Wages Payable 219   500
Bob Night, Capital 311   138,250
    206,250 206,250
 
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Exercise 2-15 A Prepaid Items On Financial Statements

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Exercise 2-15A

Prepaid items on financial statements

Life, Inc., experienced the following events in 2016, its first year of operation:

1. Performed counseling services for $36,000 cash.

2. On February 1, 2016, paid $18,000 cash to rent office space for the coming year.

3. Adjusted the accounts to reflect the amount of rent used during the year.

Required

Based on this information alone:

a. Record the events under an accounting equation.

TABLE PROVIDED BELOW

 

EXERCISE 2-15A

a.

Life, Inc.

Effect of Events on the Accounting Equation
 
  Assets = Stockholders’ Equity
 

Event

  

Cash

 Prepaid Rent  

=

  

Retained Earnings
1. Performed Services 36,000     36,000
2. Prepaid Rent (18,000) 18,000   NA
3. Used Rent   (18,000)   (18,000)       
Totals 18,000 0  = 18,000
         

*

 

b. Prepare an income statement, balance sheet, and statement of cash flows for the 2016 accounting period.

Life, Inc.

Income Statement

For the Year Ended December 31, 2016
       
     Revenue 36,000  
     Expense 18,000  
       
     Net Income 18,000  
       

 

 

 

 

Life, Inc.

Balance Sheet

As of December 31, 2016
         
  Assets      
        Cash 36,000    
        Prepaid Rent 18,000    
  Total Assets 54,000    
                      
  Liabilities (18,000)    
         
  Stockholders’ Equity      
        Retained Earnings      
  Total Stockholders’ Equity      
         
  Total Liab. and Stockholders’ Equity      
         

EXERCISE 2-15A b. (cont.)

 

Life, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2016
         
  Cash Flows From Operating Activities:      
     Cash Receipt from Revenue      
     Cash Payment for Rent      
  Net Cash Flow from Operating Activities      
         
  Cash Flows From Investing Activities      
         
  Cash Flows From Financing Activities:      
         
  Net Change in Cash      
  Plus: Beginning Cash Balance      
  Ending Cash Balance      
         

 

c. Ignoring all other future events, what is the amount of rent expense that would be recognized

in 2017?

 

EXERCISE 2-19A

 

Exercise 2-19A on page 111

Exercise 2-19A Supplies, unearned revenue, and the financial statements model

Hart, Attorney at Law, experienced the following transactions in 2016, the first year of

operations:

1. Accepted $36,000 on April 1, 2016, as a retainer for services to be performed evenly over the

next 12 months.

2. Performed legal services for cash of $54,000.

3. Purchased $2,800 of office supplies on account.

4. Paid $2,400 of the amount due on accounts payable.

5. Paid a cash dividend to the stockholders of $5,000.

6. Paid cash for operating expenses of $31,000.

7. Determined that at the end of the accounting period $200 of office supplies remained on

hand.

8. On December 31, 2016, recognized the revenue that had been earned for services performed

in accordance with Transaction 1.

Required

Show the effects of the events on the financial statements using a horizontal statements model

like the following one. In the Cash Flows column, use the initials OA to designate operating activity, IA for investing activity, FA for financing activity, and NC for net change in cash. Use NA

to indicate accounts not affected by the event. The first event has been recorded as an example.

Event

Assets 5 Liabilities 1 Stk. Equity

No. Cash 1 Supplies 5 Accts. Pay 1 Unearn. Rev. 1 Ret. Earn. Rev. 2 Exp. 5 Net Inc. Cash Flow

1. 36,000 1 NA 5 NA 1 36,000 1 NA NA 2 NA 5 NA 36,000 OA

TABLE PROVIDED BELOW

 

 

 

Hart Attorney At Law

Effect of Transactions on the Financial Statements for 2016
 
    Balance Sheet   Income Statement   Statement of
    Assets = Liabilities + S. Equity   Rev – Exp. = Net Inc.   Cash Flows
 

No.

    

Cash

  

+

  

Supplies

  

=

 Accts. Payable  

+

 Unearn. Rev.  

+

 Retained

Earnings

                
1.     +   =   +   +       –   =      
2.     +   =   +   +       –   =      
3.     +   =   +   +       –   =      
4.     +   =   +   +       –   =      
5.     +   =   +   +       –   =      
6.     +   =   +   +       –   =      
7.     +   =   +   +       –   =      
8.     +   =   +   +       –   =      
Totals   51,600 + 200 = 400 + 9,000 + 42,400   81,000 – 33,600 = 47,400   51,600  NC
                                     

 

 

 

 

 

 

 

 

 

 

 

 

 

EXERCISE 2-27A

 

Exercise 2-27A Effect of accounting events on the income statement and statement

of cash flows

Required

Explain how each of the following events or series of events and the related adjusting entry will

affect the amount of net income and the amount of cash flow from operating activities reported

on the year-end financial statements. Identify the direction of change (increase, decrease, or NA)

and the amount of the change. Organize your answers according to the following table. The first

event is recorded as an example. If an event does not have a related adjusting entry, record only

Cash Flows from

Net Income Operating Activities

Event/ Direction of Amount of Direction of Amount of

Adjustment Change Change Change Change

a NA NA Decrease $9,000

Adj Decrease $2,250 NA NA

a. Paid $9,000 cash on October 1 to purchase a one-year insurance policy.

b. Purchased $2,000 of supplies on account. Paid $500 cash on accounts payable. The ending

balance in the Supplies account, after adjustment, was $300.

c. Provided services for $10,000 cash.

d. Collected $2,400 in advance for services to be performed in the future. The contract called for

services to start on May 1 and to continue for one year.

e. Accrued salaries amounting to $5,600.

f. Sold land that cost $3,000 for $3,000 cash.

g. Acquired $15,000 cash from the issue of common stock.

h. Earned $12,000 of revenue on account. Collected $8,000 cash from accounts receivable.

i. Paid cash operating expenses of $4,500.

e. Paid cash for rent expense.

f. Performed services for cash.

g. Performed services for clients on account.

h. Collected cash from accounts receivable.

i. Received cash for services to be performed in the future.

j. Purchased land with cash.

TABLE PROVIDED BELOW

 

   

Net Income

 Cash Flow from

Operating Activities
 

Event/Adj.

 Direction of Change Amount of Change Direction of Change Amount of Change
a. Event

Adj.

        
b. Event

Adj.

        
b.   Event

No adj.

        
d. Event

Adj.

        
e.  Event

No adj.

        
f.   Event

No adj.

        
f.       Event

No adj.

        
g.   Event

No adj.

        
h.   Event

No adj.

        

 

 

 

 

 
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Chapter 3 WileyPlus

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Chapter 3 WileyPlus

 

Brief Exercise 1-9

Do It! Review 1-3

Exercise 3-1

Exercise 3-6

Brief Exercise 3-4

Do It! Review 3-4

Problem 3-5A

 

Brief Exercise 1-9

At the beginning of the year, Goren Company had total assets of $856,100 and total liabilities of $519,000. (Treat each item independently.)

(a) If total assets increased $177,500 during the year and total liabilities decreased $82,900, what is the amount of stockholders’ equity at the end of the year?

Stockholders’ equity$

 

(b) During the year, total liabilities increased $104,500 and stockholders’ equity decreased $65,800. What is the amount of total assets at the end of the year?

Total assets$http://edugen.wileyplus.com/edugen/art2/common/pixel.gif

 

(c) If total assets decreased $83,400 and stockholders’ equity increased $101,700 during the year, what is the amount of total liabilities at the end of the year?

Total liabilities$

 

Do It! Review 1-3

Marsh Corporation began operations on January 1, 2014. The following information is available for Marsh Corporation on December 31, 2014.

Accounts payable        $ 8,230                        Notes payable              $ 13,460

Accounts receivable    5,230               Rent expense               13,230

Advertising expense    4,260               Retained earnings        ?

Cash                            6,330               Service revenue           31,460

Common stock                        18,230             Supplies                       5,130

Dividends                    5,730               Supplies expense         1,440

Equipment                   30,030

 

Don’t show me this message again for the assignment

 

Prepare an income statement for Marsh Corporation.

Prepare a retained earnings statement for Marsh Corporation. (List items that increase retained earnings first.)

Prepare a balance sheet for Marsh Corporation. (List assets in order of liquidity.)

 

Exercise 3-1

Selected transactions for Warner Advertising Company, Inc., are listed here.

Describe the effect of each transaction on assets, liabilities, and stockholders’ equity.

 

1. Issued common stock to investors in exchange for cash received from investors.

2. Paid monthly rent.

3. Received cash from customers when service was performed.

4. Billed customers for services performed.

5. Paid dividend to stockholders.

6. Incurred advertising expense on account.

7. Received cash from customers billed in (4).

8. Purchased additional equipment for cash.

9. Purchased equipment on account.

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Exercise 3-6

Selected transactions for Home Place, an interior decorator corporation, in its first month of business, are as follows.

1. Issued stock to investors for $15,710 in cash.

2. Purchased used car for $10,150 cash for use in business.

3. Purchased supplies on account for $240.

4. Billed customers $4,820 for services performed.

5. Paid $230 cash for advertising start of the business.

6. Received $1,730 cash from customers billed in transaction (4).

7. Paid creditor $360 cash on account.

8. Paid dividends of $390 cash to stockholders.

 

For each transaction indicate the basic type of account debited and credited (asset, liability, stockholders’ equity); the specific account debited and credited (Cash, Rent Expense, Service Revenue, etc.); whether the specific account is increased or decreased; and the normal balance of the specific account.

Journalize the transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

 

Brief Exercise 3-4

For each of the following accounts, indicate the effect of a debit or a credit on the account and the normal balance.

Debit Effect     Credit Effect    Normal Balance

(a)        Accounts Payable

(b)        Advertising Expense

(c)        Service Revenue

(d)        Accounts Receivable

(e)        Retained Earnings

(f)        Dividends

 

Do It! Review 3-4

Joel Blocker recorded the following transactions during the month of April.

Apr. 3 Cash                                        1,970

Service Revenue                                1,970

16        Rent Expense                           410

Cash                                                  410

20        Salaries and Wages Expense    450

Cash                                                  450

 

Post these entries to the Cash account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $3,370. (Post entries in the order of journal entries presented in the question.)

 

Problem 3-5A

Foyle Architects incorporated as licensed architects on April 1, 2014. During the first month of the operation of the business, these events and transactions occurred:

Apr. 1  Stockholders invested $23,584 cash in exchange for common stock of the corporation.

1          Hired a secretary-receptionist at a salary of $491 per week, payable monthly.

2          Paid office rent for the month $1,179.

3          Purchased architectural supplies on account from Burlington Company $1,703.

10        Completed blueprints on a carport and billed client $2,489 for services.

11        Received $917 cash advance from J. Madison to design a new home.

20        Received $3,669 cash for services completed and delivered to M. Svetlana.

30        Paid secretary-receptionist for the month $1,964.

30        Paid $393 to Burlington Company for accounts payable due.

Don’t show me this message again for the assignment

 

Journalize the transactions. (If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

 

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Post to the ledger T-accounts. (Post entries in the order of journal entries presented in the question.)

Prepare a trial balance on April 30, 2014.

 

 

 
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Accounting Income Tax.

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Chapter 2

Problems-

I:2-29

I:2-30

I:2-31

I:2-32

I:2-33

I:2-35

I:2-37

I:2-38

I:2-42

I:2-43

I:2-46

I:2-55

I:2-63

Chapter 3

Problems-

I:3-34

I:3-35

I:3-39

I:3-41

I:3-42

I:3-43

I:3-44

I:3-61

Chapter 4

Problems-

I:4-33

I:4-34

I:4-35

I:4-39

I:4-40

I:4-41

I:4-42

Chapter 2

http://media.pearsoncmg.com/pcp/0558586775/index.html

 

PROBLEMS

 

I: 2-29

Computation of Tax.

 

The following information relates to two married couples:

 

Lanes Waynes

 

Salary (earned by one spouse) $32,000 $115,000

Interest income 1,000 10,000

Deductible IRA contribution 5,000 0

Itemized deductions 15,000 15,000

Exemptions 7,300 7,300

Withholding 700 18,700

 

Compute the 2009 tax due or refund due for each couple. Assume that the itemized deductions have been reduced by the applicable floors.

 

Lanes Taxable Income: 32,000 + 1,000 – 5,000 – 15000 – 7,300 = 5,700

Lanes Tax: 573.00

Refund: 700 – 573 = 127.00

 

Wayne’s Taxable Income: 11,500 + 10,000 – 0 – 15,000 – 7,300= 102,700

Wayne’s Tax: 102,700 x 0.25 – 7,625=

18,050

Refund: 18,700 – 18,050= 650.00

 

I: 2-30

Computation of Taxable Income.

 

The following information for 2009 relates to Tom, a single taxpayer, age 18:

 

Salary $1,800

Interest income 1,600

Itemized deductions 600

 

 

a. Compute Tom’s taxable income assuming he is self-supporting.

 

Gross Income =                                    3,400

Minus Itemized deductions         (600)

Minus personal exemption          (3,650)

Taxable Income =                               ($850)

 

b. Compute Tom’s taxable income assuming he is a dependent of his parents.

 

Gross Income =                                    3,400

Minus Itemized deductions         (600)

Taxable Income =                              $2,800

 

 

 

 

 

 

 

I: 2-31

Joint versus Separate Returns.

 

Carl and Carol have salaries of $14,000 and $22,000, respectively. Their itemized deductions total $6,000. They are married and both are under age 65.

 

a. Compute their taxable income assuming they file jointly.

 

b. Compute their taxable incomes assuming they file separate returns and that Carol claims all of the itemized deductions.

 

 

I: 2-32

Joint versus Separate Returns.

 

Hal attended school much of 2009, during which time he was supported by his parents. Hal married Ruth in December 2009. Hal graduated and commenced work in 2010. Ruth worked during 2009 and earned $18,000. Hal’s only income was $1,100 of interest. Hal’s parents are in the 28% tax bracket. Thus, claiming Hal as a dependent would save them $1,022 (0.28 X $3,650) of taxes.

 

a. Compute Hal and Ruth’s gross tax if they file a joint return.

 

b. Compute Ruth’s gross tax if she files a separate return in order to allow Hal’s parents to claim him as a dependent.

 

c. Which alternative would be better for the family? In other words, will filing a joint return save Hal and Ruth more than $1,022?

 

 

 

 

 

 

 

 

I: 2-33

Dependency Exemptions.

 

Wes and Tina are a married couple and provide financial assistance to several persons during the current year. For the situations below, determine whether the individuals qualify as dependency exemptions for Wes and Tina. In all of the situations below, assume that any dependency tests not mentioned have been met.

 

a. Brian is age 24 and Wes and Tina’s son. He is a full-time student and lives in an apartment near campus. Wes and Tina provide over 50% of his support. Brian works as a waiter and earned $3,800.

 

b. Same as Part a except that Brian is a part-time student

 

c. Sherry is age 22 and Wes and Tina’s daughter. She is a full-time student and lives in the dormitory. Wes and Tina provide over 50% of her support. Sherry works part time as a bookkeeper and earned $3,800.

 

d. Same as Part c except that Sherry is a part-time student.

 

e. Granny, age 82, is Tina’s grandmother and lives with Wes and Tina. During the current year, Granny’s only sources of income were her Social Security of $4,800 and interest on U.S. bonds of $3,800. Granny uses her income to pay for 40% of her total support; Wes and Tina provide the remainder of Granny’s support.

 

 

I: 2-35

Dependency Exemptions.

Robert provides much of the support for his daughter, Jane, and her two children. Jane earned $20,000. Robert, whose AGI is $350,000, paid the rent of $11,000 on Jane’s apartment and provided an additional $15,000 support. Jane is age 30, and her children are age 7 and age 4.

 

a. Can Robert claim a dependency exemption for Jane? No.

 

b. Can Jane claim her children as dependents? Yes.

 

c. Would you recommend that Robert try to claim the dependency exemption for his grandchildren? Yes.

 

 

I: 2-37

Dependency Exemptions.

 

Anna, age 65, who lives with her unmarried son, Mario, received $7,000, which was used for her support during the year. The sources of support were as follows:

 

Social Security benefits $1,500

Mario 2,600

Caroline, an unrelated friend 800

Doug, Anna’s son 500

Elaine, Anna’s sister 1,600

Total $7,000

 

a. Who is eligible to claim Anna as a dependent?

 

b. What must be done before Mario can claim the exemption?

 

c. Can anyone claim head-of-household status based on Anna’s dependency exemption? Explain.

 

d. Can Mario claim an old age allowance for his mother? Explain.

 

 

 

 

 

 

 

I: 2-38

Dependency Exemption and Child Credit: Divorced Parents.

 

Joe and Joan divorce during the current year. Joan receives custody of their three children. Joe agrees to pay $5,000 of child support for each child.

 

a. Assuming no written agreement, who will receive the dependency exemption and child credit for the children? Explain.

 

b. Would it make any difference if Joe could prove that he provided over one-half of the support for each child?

 

 

I: 2-42

Marriage and Taxes.

 

Bill and Mary plan to marry in December 2009. Bill’s salary is $32,000 and he owns his own residence. His itemized deductions total $12,000. Mary’s salary is $39,000. Her itemized deductions total only $1,600 as she does not own her own residence. For purposes of this problem, assume 2010 tax rates, exemptions, and standard deductions are the same as 2009.

 

a. What will their tax be if they marry before year-end and file a joint return? 12,000

 

b. What will their combined taxes be for the year if they delay the marriage until 2010? 13,600

 

c. What factors contribute to the difference in taxes? Itemized Deductions

 

I: 2-43

Filing Requirement.

 

Which of the following taxpayers must file a 2009 return?

 

a. Amy, age 19 and single, has $8,050 of wages, $800 of interest, and $350 of self employment income.

 

b. Betty, age 67 and single, has a taxable pension of $9,100 and Social Security benefits of $6,200.

 

c. Chris, age 15 and single, is a dependent of his parents. Chris has earned income of $1,600 and interest of $400.

 

d. Dawn, age 15 and single, is a dependent of her parents. She has earned income of $400 and interest of $1,600.

 

e. Doug, age 25, and his wife are separated. He earned $5,000 while attending school during the year.

 

I: 2-46

Computation of Taxable Income.

 

Jim and Pat are married and file jointly. In 2009, Jim earned a salary of $46,000. Pat is self-employed. Her gross business income was $49,000 and her business expenses totaled $24,000. Each contributed $5,000 to a deductible IRA. Their itemized deductions total $13,000. Compute Parts a, b, and c without regard to self employment tax.

 

a. Compute their gross income.

 

b. Compute their adjusted gross income.

 

c. Compute their taxable income assuming they have a dependent daughter.

 

 

I: 2-55

Computation of Tax.

 

Maria is a single taxpayer. Her salary is $51,000. Maria realized a short term capital loss of $5,000. Her itemized deductions total $4,000.

 

a. Compute Maria’s adjusted gross income.

 

b. Compute her taxable income.

 

c. . Compute her tax liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE STUDY PROBLEMS

 

I: 2-63

 

Bala and Ann purchased as investments three identical parcels of land over a several-year period. Two years ago they gave one parcel to their daughter, Kim, who is now age 16. They have an offer from an investor who is interested in acquiring all three parcels. The buyer is able to purchase only two of the parcels now, but wants to purchase the third parcel two or three years from now, when he expects to have available funds to acquire the property. Because they paid different prices for the parcels, the sales will result in different amounts of gains and losses. The sale of one parcel owned by Bala and Ann will result in a $20,000 gain and the sale of the other parcel will result in a $28,000 loss. The sale of the parcel owned by Kim will result in a $19,000 gain. Kim has no other income and does not expect any significant income for several years. Bala and Ann, however, are in the 35% tax bracket. They do not have any other capital gains this year. Which two properties would you recommend that they sell this year? Why?

 
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