Question

Bryan followed in his father’s footsteps and entered into the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue, he also cleans carpets and sells carpet-cleaning supplies.

A. IDC contracted with a homebuilder in December of last year to install carpet in 10 new homes being built. The contract price of $87,500 includes $53,000 for materials (carpet). The remaining $34,500 is for IDC’s service of installing the carpet. The contract also stated that all money was to be paid up front. The homebuilder paid IDC in full on December 28 of last year. The contract required IDC to complete the work by January 31 of this year. Bryan purchased the necessary carpet on January 2 and began working on the first home January 4. He completed the last home on January 27 of this year.

B. IDC entered into several other contracts this year and completed the work before year-end. The work cost $160,000 in materials. Bryan billed out $243,000 but only collected $220,000 by year-end. Of the $23,000 still owed to him, Bryan wrote off $3,750 he didn’t expect to collect as a bad debt from a customer experiencing extreme financial difficulties.

C. IDC entered into a three-year contract to clean the carpets of an office building. The contract specified that IDC would clean the carpets monthly from July 1 of this year through June 30 three years hence. IDC received payment in full of $9,180 ($255 a month for 36 months) on June 30 of this year.

D. IDC sold 100 bottles of carpet stain remover this year for $5 per bottle (it collected $500). IDC sold 40 bottles on June 1 and 60 bottles on November 2. IDC had the following carpet-cleaning supplies on hand for this year and it uses the LIFO method of accounting for inventory under a perpetual inventory system:

Purchase Date	Bottles		Total Cost
November last year	40		$240
February this year	35		172
July this year	25		160
August this year	40		290
Totals	140		$862

E. On August 1 of this year, IDC needed more room for storage and paid $1,800 to rent a garage for 12 months.

F. On November 30 of this year, Bryan decided it was time to get his logo on the sides of his work van. IDC hired We Paint Anything Inc. (WPA) to do the job. It paid $800 down and agreed to pay the remaining $2,400 upon completion of the job. WPA indicated it wouldn’t be able to begin the job until January 15 of next year, but the job would only take one week to complete. Due to circumstances beyond its control, WPA wasn’t able to complete the job until April 1 of next year, at which time IDC paid the remaining $2,400.

G. In December, Bryan’s son, Aiden, helped him finish some carpeting jobs. IDC owed Aiden $900 (reasonable) compensation for his work. However, Aiden did not receive the payment until January of next year.

H. IDC also paid $4,000 for interest on a short-term bank loan relating to the period from November 1 of this year through March 31 of next year.

Compute his taxable income for the current year considering the following items: (Negative amounts should be indicated by a minus sign. Enter zero for no effect on taxable income. Do not round intermediate calculations.)  

For each item, fill in whether it is revenue, COGS, or other deductions and how much on the cash and accrual method.

Answer 1

We have to calculate the taxable income for the current year ,

	Particulars	Cash method	Accural method
a	prepaid carpeting services	0	87500
a	carpet supplies	$53,000	$53,000
b	carpeting services	$220,000	$243,000
b	materials needed for contracts	$160,000	$160,000
b	Bad debt	-	$3,750
c	cleaning services	$9,180	$1530(255*6months)
d	stain remover sales	$500	$500
d	stain remover	$793	$781.74
e	prepaid rent	$1,800	$750(1800*5/12)
f	prepaid paint job	$800	$800
g	compensation to aiden	$900	$900
h	prepaid interest	$1600(4000*2/5)	$1600
	total deductions	$4200(prepaid rent+prepaidinterest+prepaid paint job)	$3150
	taxable income	Total deductions+3589=$7789	3150+105303=$108453