Problems in Accounting ACA1 WGU-COMPLETE COURSE all 6 tasks - A+ WORK
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This tutorial contains the attachments for the entire ACA1 Problems in Accounting course. These attachments passed the Taskstream evaulations.
Task 1 is based on the financials of Fan Company A and includes the calculations necessary to complete the financial statements and a brief discussion commenting on the need for reconciling book income for a partnership to taxable income for that partnership for tax purposes.
Task 2 is an essay recommmending the most advantageous tax filing status for Spouse A and Spouse B on their federal tax return, explaining the recommendation based on current applicable tax laws. It also explains the rules that apply to taxable and nontaxable income, short-term and long-term captial gains or losses, profit or loss from sale of property, partnership income and losses, and gains or losses from passive activity. It explains the decision to include or exclude each of the preceding types of income, calculate the adjustments to income that should be included on the return and explain each adjustment, determine whether the couple should use the standard deduction or itemized deductions on thier returns and explain this decision, and identify and explain all tax credits available to the couple.
Task 3 is based on the financials of ABC Company. This tutorial contains the calculations for ABC as a corporation for taxable income or loss, special tax deductions allowed, tax treatment of capital gains and losses, and the expense item limitations on a corporate tax return. It also contains the calculations for ABC as an S-corporation for taxable income or loss, special tax deductions allowed, tax treatment of capital gains and losses, and the expense item limitations on a corporate tax return. Also included is an essay describing how to reconcile the book income tax differences for ABC as a corporation and an s-corporation, and a recommendation for the board of directors about whether or not ABC should become an s-corporation based on the calculation.
Task 4 is based on the inventory data of Fan Company A. This tutorial includes computation of the value of ending inventory using Periodic FIFO, Periodic average cost, LIFO in a perpetual inventory system, and FIFO in a perpetual inventory system. It also includes a short memo to the Fan Company A partners explaining your findings, reocmmending a method for computing inventory, and justifying this recommendation.
Task 5 is based on financial data for Fan Company A. This tutorial includes calculating the depreciation for Fan Company A's building using the straight line method, calculating the depreciation for Fan Company A's equipment using the double-declining balance, units of output, and sum-of-the-years-digits methods, and writing an essay to suggest an appropriate method for depreciating the equipment and a justification for this recommendation.
Task 6 is based on tie and rail costs for Railway Company A. This tutorial includes the calculation of depreciation expense for the year using the composite method for 2010 and 2011, calculation of depreciation expense for the year on the ties using the group method, and computation of the group depreciation rate for 2011.
Task 1 Part B
It is important to reconcile book income to taxable income for tax purposes. Book income and taxable income may vary due to different accounting methods used (accrual vs. cash) or from various temporary and permanent differences. These occur because of the different reporting rules between GAAP which is used in reporting book income and the Internal Revenue Code which is used in reporting taxable income. It is important to reconcile these two forms of reporting income in order to prevent errors resulting in improper tax payments and/or improper partnership distributions.
ACA1 TAX TREATMENTS FOR INDIVIDUAL RETURNS (TASK 302.2.3)
Recommended Tax Filing Status:
There are five filing statuses available for taxpayers according to the IRS. They are:
Single
Married Filing Separately
Married Filing Jointly
Head of Household
Qualifying Widow(er) with dependent child
The recommended tax filing status for this couple is married filing jointly. This couple will qualify for 2 personal exemptions and 3 dependency exemptions for their 3 children. They are allowed exemptions for all 3 children because they are all under the age of 19 and all live in the household. They are not allowed exemptions for Spouse B’s mother because they did not provide over half of the support for her for the year. Her rent, food, and other family contribution to her support totals $7,000 and she gives them $7,920 per year from her Social Security income.
A1. Recommendation Explained
The married filing jointly status is most advantageous for this couple because the tax rates are higher for married taxpayers filing separately. Additionally, many exclusions, deductions and credits are not allowed when filing separately. For example, this couple is able to exclude the total income on the sale of their personal residence, whereas if they had filed separately, they would have only been able to deduct $250,000 of that income.
A2a. Taxable and Non-Taxable Income
According to the IRS, the definition of income is all of the taxpayer’s income, both taxable and non-taxable. The items and amounts that would be considered taxable income for this couple are:
$142,000 income from Spouse A’s partnership in Fan Company A
$2,000 income from City Park referee job
$88,000 income from Spouse B’s Controller job
Total of 2011 dividends received by Spouse A from Company E
($5,000) loss on day trading by Spouse B while unemployed
The items and amounts that would be considered non-taxable income for this couple are:
$2400 Child support received by Spouse B as these payments are considered to be used for the care of the child
$900 income in interest payments received on Municipal Bond because interest received on municipal bonds is tax exempt.
$296,000 income on sale of their personal residence. Section 121 allows the taxpayer exclusion of $250,000 on the sale of a principal residence. For married couples filing jointly, the exclusion is $500,000.
Health care premiums paid by Spouse B’s employer are not considered as income.
A2b. Capital Gains and Losses
A capital gain or loss refers to a profit or loss on the sale of a capital asset. A short-term capital
gain or loss applies to assets that are owned for a year or less and a long-term capital gain or loss applies to assets that are owned for over a year. The couple potentially has $44,000 in long-term capital gains, as they sold a rental house that they purchased 4 years ago for $90,000 and sold it in this period for $134,000. However, this gain needs to be recalculated, taking in to account purchase costs, selling costs, repairs or improvements, rent received in this period, and accumulated depreciation. If it remains a gain after calculating the adjusted basis, it will be reported as a capital gain. If it is a loss, it will be deducted from total income.
Spouse B had a $5,000 capital loss from day trading while he was unemployed. However, only $3,000 of capital loss deductions per year are allowed by the IRS. The additional $2,000 loss can be carried forward to next year.
A2c. Profit or Losses from Sale of Property
The proceeds from the sale of a personal residence are taxable, however Section 121 allows an exclusion of $250,000 of the proceeds or $500,000 if the couple is married and filing jointly, if the taxpayer has owned and used the residence for at least two of the 5 years prior to the date of the sale. This exclusion also only applies if this exclusion has not been used within the past two years on another sale. These rules apply to this couple because they had proceeds from the sale of their personal residence of $296,000 that were excluded because they are filing a joint return, they had lived and used the residence for at least two of the 5 years prior to the date of the sale, and they had not had another Section 121 exclusion within the last two years.
The proceeds from the sale of a rental property are taxable, based on the adjusted cost basis of the property. This adjusted basis includes purchasing and selling costs, repairs and improvements, rent received in the period prior to the sale, and accumulated depreciation on the property. Profits are reported as capital gains and losses are reported as ordinary losses, deductible from total income.
A2d. Partnership Income and Losses
Partnership Income and Losses are reported to the IRS on Form 1065. Partnership Income and Losses are reported to the partners on Schedule K-1. For this couple, $142,000 income will be reported from the partnership on Schedule E of Form 1040. Withdrawals of $85,000 were made but are not taxable unless they exceed the partner’s basis in the partnership.
A2e. Passive Activity Gains and Losses
This couple will have the following items classified as passive activities:
A $6,200 passive loss on two rental properties which had total gross rents of $23,000 less total expenses and depreciation of $29,200.
A $44,000 passive gain on the sale of a rental property, which could be offset when the adjusted cost basis is figured for the property. This basis will take into account purchase costs, selling costs, improvements, rent received in this period, and accumulated depreciation.
Passive activities are activities in which you don’t actively participate and rental activities. The IRS limits deductions for losses from rental properties to $25,000 per year. (Rental Income and Expenses, 2012)
A4. Adjustments to Income
Adjusted gross income (AGI) is gross income less any allowed adjustments to this income. This couple has the following items that would be considered adjustments to income:
$7,200 Alimony paid to Spouse A’s ex-wife
Contributions made to Keogh retirement plan
The couple cannot deduct moving expenses incurred when they moved to a new house due to Spouse B’s new job. The rules state that these expenses are deductible if your new workplace is at least 50 miles farther from your former residence than your prior residence was from your prior job. Spouse B’s new job is 49 miles farther from her old home than it was from her prior job. (Willis, 2011)
The couple can deduct a portion of the self-employment tax incurred on Spouse A’s income from the partnership. (Schedule SE (Form 1040) Self-Employment Tax, 2011)
Spouse A may qualify for a self-employed health insurance deduction for his health insurance through the partnership.
The couple may be able to deduct tuition and fees paid for their dependent that is a freshman in college if their modified adjusted gross income is $160,000 or less. (Form 8917 Tuition and Fees Deduction, 2011)
A4a. Explanation of Adjustments to Income
The couple qualifies for these adjustments to income:
$7200 Alimony paid to Spouse A’s ex-wife because alimony is deductible for the person making the payment and taxable for the person receiving the payment.
Contributions made to Keogh retirement plan as benefit amounts up to the lesser of $49,000 or 100% of earned income are not taxable in a defined contribution plan, and up to 25% if it is a defined contribution plan with profit sharing or a bonus plan. (Willis, 2011)
A5. Deductions
The couple should take the standard deduction.
A5a. Explanation of Deductions Decision
The couple should take the standard deduction because the standard deduction would likely be more than their itemized deductions. If the couple itemized, they would be able to deduct their medical expenses that exceeded 7.5% of their AGI and their $6,000 in charitable contributions.
They would not be able to deduct:
The mileage to commute to and from work
$2,600 spent by Spouse B for business suits for the new job because these are adaptable for regular wear.
A6. Tax Credits:
A tax credit is a tax benefit that reduces the amount of tax owed by the taxpayer.
This couple qualifies for these 3 tax credits:
Child Tax Credit
American Opportunity Tax Credit
Saver’s Credit
A6a. Explanation of Tax Credits
Child Tax Credit in the amount of $1,000 per qualifying child, which totals $2,000. The amount of this credit may be reduced if AGI is above $110,000. (Willis, 2011)
American Opportunity Tax Credit of up to $2,500 for qualified expenses of a college student. This credit applies to couples with a modified adjusted gross income of $160,000 or less. (American Opportunity Tax Credit, 2012) (2011 Instructions for Form 8863 Education Credits, 2011)
Saver’s Credit of up to $2,000 for taxpayer’s filing jointly which contribute to qualified retirement plans. It is based on the amount contributed to the plan, and the credit will be calculated on contributions up to $4,000 per year. (Saver's Credit, 2012)
References
2011 Instructions for Form 8863 Education Credits. (2011). Retrieved 09 27, 2012, from Internal Revenue Service: www.irs.gov/pub/irs-pdf/i8863.pdf
American Opportunity Tax Credit. (2012, 08 12). Retrieved 09 27, 2012, from IRS: http://www.irs.gov/uac/American-Opportunity-Tax-Credit
Form 8917 Tuition and Fees Deduction. (2011). Retrieved 09 27, 2012, from Internal Revenue Service: www.irs.gov/pub/irs-pdf/f8917.pdf
Rental Income and Expenses. (2012, 02 21). Retrieved 09 25, 2012, from About.com: http://taxes.about.com/od/taxhelp/a/Schedule_E.htm
Saver's Credit. (2012, 09 28). Retrieved 09 28, 2012, from efile.com: http://www.efile.com/tax-credit/savers-credit-retirement-savings-contributions-credit/
Schedule SE (Form 1040) Self-Employment Tax. (2011). Retrieved 09 27, 2012, from Internal Revenue Service: www.irs.gov/pub/irs-pdf/f1040sse.pdf
Willis, H. M. (2011). South-Western Federal Taxation 2011: Comprehensive.
302.2.4-01-05, 07-10 Task 3 Part C
It is important to reconcile book income to taxable income for tax purposes. Book income and taxable income may vary due to different accounting methods used (accrual vs. cash) or from various temporary and permanent differences. These occur because of the different reporting rules between GAAP which is used in reporting book income and the Internal Revenue Code which is used in reporting taxable income. It is important to reconcile these two forms of reporting income in order to prevent errors resulting in improper tax payments and/or improper distributions.
C-corporations use Schedule M-1 of Form 1120 to reconcile book income and taxable income and corporation with less than $10 million in total assets are required to use this form. On Schedule M-1, federal income tax expense, the excess of capital losses over capital gain, and various other expenses, such as charitable donations over the 10% allowed for corporations, which are not deductible from taxable income are added to net income. Also any prepaid income is added back in as this is only included in taxable income but not in book income. Items such as tax-exempt interest and other items allowed as deductions from income tax but not expensed in book income are subtracted from net income. Corporations with more than $10 million in total assets are required to file form M-3, which is a much more detailed report than M-1.
S-corporations are treated much in the same way as partnerships in that most items are passed through to the individual partners for tax purposes. These items such as dividend income, charitable contributions, and capital gains and losses, are added back to or subtracted from net income to calculate taxable income and are reported on Schedule K of Form 1120S.
For ABC Company as a C-corporation, they will need to reconcile the difference in the charitable contribution made and the 10% ceiling deductible per IRS. They will also need to reconcile the Dividend Received Deduction allowed by IRS but that is not to be deducted from book income.
For ABC Company as a S-corporation, they will need to add or subtract separately stated items such as dividends received, casualty losses, and charitable deductions to or from book income to arrive at taxable income.
| | ABC COMPANY |
Memo
To: Board of Directors, ABC Company
From: WGU student
Date: 10/16/2013
Re: Recommendation
I have been asked to give you a recommendation on whether or not to change your corporation from its present C Corporation status to an S Corporation status. My recommendation is to keep your current C Corporation status for the following reasons:
As a C Corporation, you are allowed 10% of your taxable income for charitable contributions, as opposed to an S-corporation where the charitable contributions are deductible by the shareholders, based on their percentage of ownership.
As a C Corporation, you are allowed a deduction for dividends that were received. Since ABC Company owns 20% of XYZ Company, ABC Company is allowed a deduction equal to the lesser of 80% of the dividend amount received or 80% of taxable income. As an S Corporation, these dividends are reported by the individual shareholders as part of their total income, based on their percentage of ownership.
Additionally, if you change your status you may still be liable for some corporate-level taxes such as the built-in gains tax and the LIFO recapture tax.
Thank you.
Sincerely,
WGU Student
| | FAN COMPANY A |
Memo
To: Fan Company A Partners
From: WGU Student
Date: 10/16/2013
Re: Recommended Inventory Method
I have computed the value of your ending inventory using the following methods:
1. Periodic FIFO
2. Periodic average cost
3. Perpetual FIFO
4. Perpetual LIFO
I have come to the following conclusions:
Under the periodic FIFO method, the ending inventory is calculated only once per period , usually at the end of the year. It is calculated by subtracting the actual number of units sold from the number of units purchase to arrive at the ending number of inventory units. Because we are using the First In First Out method, we value the 900 ending inventory units at the latest cost of $58.25, which is the price paid for the last shipment of 1750 units in June, and determine the ending inventory value to be $52,425.00.
Under the periodic average cost method, the average unit cost is calculated by adding up the dollar amount of the inventory purchases for the year and dividing that amount by the number of units purchased for the year. In this case, total purchases totaled $631,037.50, which was then divided by the total number of units purchased of 11675, giving an average cost of $54.05. This average cost is then multiplied by the ending number of 900 units in inventory to arrive at the ending inventory figure of $48,645.00.
Under the perpetual FIFO method, the inventory value is constantly changing. With this method, costs are assigned according to age, with the first purchase costs being assigned to the first sales units. Once all of the units from the earliest purchase have been sold, costs are assigned from the next earliest purchase and so on. Many times, as is shown on the template, monthly inventory units are valued at different costs. For example, in March the beginning inventory balance contained 1525 units @ $50each. 1700 additional units were purchased in March at a unit cost of $55 each. Sales for the month of March totaled 2150 units. Therefore, we must value the first 1525 units sold @ $50 each and the remaining 625 units sold at $55 each, leaving an ending balance for March of $59,125, which is the remaining 1075 units @ $55 each. The ending inventory figure using for the period sampled is $52,245.00 which is the same amount as the periodic FIFO method, because both are based on using the first costs, they are just moved from inventory at different times.
Under the perpetual LIFO method, much as with the FIFO method, the inventory value is constantly changing. With this method, costs are assigned according to age as well, but with the latest purchase costs being assigned to the first sales units. Once all of the units from the latest purchase have been sold, costs are assigned from the next latest purchase and so on. Many times, as is shown on the template, monthly inventory units are valued at different costs. For example, in June the beginning inventory balance contained 550 units @ $50 each. 1750 additional units were purchased in June at a unit cost of $58.25 each. Sales for the month of June totaled 1400 units. Therefore, we must value the 1400 units sold @ $58.25 each. This leaves an inventory balance of the beginning balance of 550 units @ $50 each plus the remaining 350 units from the June purchase @ $58.25 each for an ending inventory balance for June of $47,887.50.
It is my recommendation that Fan Company A use the periodic average cost method to value its inventory. This method is very simple to calculate and is a more accurate valuation since it uses an average of a full period’s pricing. Both FIFO and LIFO calculation can easily be skewed due to sudden price changes. The average cost method will reflect a net income that is realistic and relatively consistent, which aids in future financial planning.
| FAN COMPANY A |
Memo
To: Fan Company A
From: WGU Student
Date: 10/16/2013
Re: Recommended Depreciation Method
The straight line method of depreciation is calculated by taking the cost of the item less its salvage value and dividing that number by the number of years of expected life of that item. This method is very simple to calculate and has an even impact on net income, as the same amount of depreciation is taken for each year of the useful life of the item.
The double declining balance method of depreciation is calculated at twice or 200% of the straight line rate. For example, if the straight line rate (calculated by dividing the yearly depreciation amount into the item’s cost less its salvage value) is 20%, then the rate used in the double declining balance method would be 40%. This figure is then multiplied by the item’s book value at the beginning of each period. This method deducts higher amounts in the item’s early life, which lowers net income more in the beginning years.
The units-of -output method of depreciation is calculated based on how much the item produces. The items cost less the salvage value is multiplied by the number of hours the equipment is used during the period. That number is then divided by the total number of estimated hours that the item is expected to perform in its useful life. This method is helpful for companies that base most of their costs on production. If production levels are low, then the depreciation amount will be low, therefore limiting the reduction on net income. If production levels are high, then the depreciation amount will be high, causing a bigger deduction to net income.
The sum-of-the-year’s-digits method of depreciation is calculated by using a fraction of the items cost less its salvage value. This fraction is determined by using the number of years left in the items useful life as the numerator and a sum of the year’s digits as the denominator. For example, if the item’s useful life is 5 years, the numerator in the items first year of depreciation would be 5 and the denominator would be 15 (5+4+3+2+1), for a fraction of 5/15. This fraction is then multiplied by the depreciable base of the item to determine the depreciation for that year. For the second year the numerator would be 4, the third year would be 3, and so on. When the end of the useful life is reached, the book value will always equal the salvage value. Like the double declining method, this method deducts higher amounts in the item’s early life, which lowers net income more in the beginning years.
My suggested method of depreciation for Fan Company A’s equipment would be the double declining balance method. This method depreciates higher amount earlier in the life of the asset, which will lower net income. However, this will leave room later in the life of the asset to offset repair expenses that may be necessary on the equipment.
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