Asset A.B. FMV Accounts Receivable $ 0 $ 60,000 Supplies 0 20,000 Unimproved Land 60,000 120,000 Total $ 60,000 200,000 The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense. In exchange, Architect receives 100 shares of Design common stock with a FMV of $100,000. In addition, Design assumes $70,000 of accounts payable to trade creditors of Architect's sole proprietorship and a $30,000 bank loan incurred by Architect two years ago for valid business reasons. Design elects to become a cash method, calendar year taxpayer. During the remainder of the current year, it pays the accounts payable and collects $40,000 of the accounts receivable transferred by Architect. (c) When Design pays the accounts payable assumed from architect, may it properly deduct the expenses under section 162? (d) Assume that Architect was in the 39.6% marginal tax bracket and that the corporation anticipated no significant taxable income for the current year. What result if Architect decides to retain the accounts payable but causes the corporation to assume and collect the accounts receivable?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Asset A.B. FMV
Supplies 0 20,000
Unimproved Land 60,000 120,000
Total $ 60,000 200,000
The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense.
In exchange, Architect receives 100 shares of Design common stock with a FMV of $100,000. In addition, Design assumes $70,000 of accounts payable to trade creditors of Architect's sole proprietorship and a $30,000 bank loan incurred by Architect two years ago for valid business reasons.
Design elects to become a cash method, calendar year taxpayer. During the remainder of the current year, it pays the accounts payable and collects $40,000 of the accounts receivable transferred by Architect.
(c) When Design pays the accounts payable assumed from architect, may it properly deduct the expenses under section 162?
(d) Assume that Architect was in the 39.6% marginal tax bracket and that the corporation anticipated no significant taxable income for the current year. What result if Architect decides to retain the accounts payable but causes the corporation to assume and collect the accounts receivable?
(e) Would your answer be any different if Architect had been an accrual method taxpayer?
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