Question

Duck, an accrual basis corporation, sponsored a rock concert on December 29, 2020. Gross receipts were $300,000. The following expenses were incurred and paid as indicated:

Expense				Payment Date
Rental of coliseum		$25,000		December 21, 2020
Cost of goods sold:
Food		30,000		December 30, 2020
Souvenirs		60,000		December 30, 2020
Performers		100,000		January 5, 2021
Cleaning the coliseum		$10,000		February 1, 2021

Because the coliseum was not scheduled to be used again until January 15, the company with which Duck had contracted did not perform the cleanup until January 8–10, 2021.

a. Calculate Duck's net income from the concert for tax purposes for 2020.

If an amount is zero, enter "0".

Gross receipts			$
Less:
	Coliseum rental	$
	Food
	Souvenirs
	Performers
	Cleaning costs
Total expenses
Net income for 2020			$

b. What is the true cost to Duck if it had to defer the $100,000 deduction for the performers until 2021? Assume a 5% discount rate and a 21% marginal tax rate in 2020 and 2021. The present value factor for a single sum at 5% for one year is 0.9524.

If required, round your answers to the nearest dollar.

The present value of the 2021 tax savings is $ and the cost of the deferral to Duck is $.____

Answer 1

Gross Receipts		300000
Less:
Coliseum rental	25000
Food		30000
Souvenirs	60000
Performers	100000
Cleaning cost	0
Total Expense		215000
Net income for 2020	85000

Part (b)

Since the deduction of $100,000 is going to be availed in next year, hence tax savings are going to be realised by Duck in 2021 only which is 21% of $100,000 = $21,000.

Present value of tax savings
= Present value discount factor (1 year) * Tax Savings
= 0.9524 *21,000
= $20,000.40 Answer

Cost of Deferral to Duck
= Current tax savings (if tax paid in 2020) - Present value of future tax savings (if tax paid in 2021)
= 21,000 - 20,000.40
= $999.60 Answer