Question

A local McDonald’s is operated as a franchise (treated as a separate taxable entity from McDonald’s Corporation as a whole). During 2020, the local franchise had $300,000 in cash sales and the following cash expenditures:

Rental cost of restaurant venue ($2,000 per month, starting March. 1, 2020)       $24,000
Franchise fee for 2020 (fully deductible)                                                                 $30,000
Compensation for 2020                                                                                         $53,000
Utilities for 2020                                                                                                  $9,500

In addition to the above, the owner contracted with a supplier to provide all the cleaning supplies for the location over a 12 month period starting on March 1, 2020. The owner paid $6,000 (the total cost for the contract) on April 1, 2020, and the same amount of supplies was brought in from the supplier each month. Finally, the owner paid the McDonald’s Corporation a royalty fee at 6% of store sales for the 2020 year on December 30, 2020.

1. (8 points) Assuming the local McDonald’s operates on a calendar year-end under the accrual method, what amount of net profit (loss) for the business was included in AGI for 2020?
   

      b. (8 points) Assuming the local McDonald’s operates on a calendar year-end under the cash method, what amount of net profit (loss) for the business was included in AGI for 2020?

Answer 1

Accrual Method						Cash Method
Income		Amount				Income		Amount
Cash Sales		300,000				Cash Sales		300,000
Expenditures						Expenditures
Cash						Cash
Rental Cost		240,000	24000*10			Rental Cost		240,000	24000*10
Franchise Fees		30,000				Franchise Fees		30,000
Compensation		53,000				Compensation		53,000
Utilities		9,500				Utilities		9,500
		332,500						332,500
Others						Others
Cleaning Supplies		5,000	6000/12*10		Cleaning Supplies		6,000
Royalty Fees		18,000	300000*6%		Royalty Fees		18,000	300000*6%
		23,000						24,000
Total		355,500				Total		356,500
Net Loss		-55,500				Net Loss		-56,500