While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers
in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom sculpted cakes for weddings,
birthdays, and other celebrations. James and Paul formed the business at the beginning of 2016 and each contributed
$50,000 in exchange for a 50 percent ownership interest. GTE also borrowed $200,000 from a local bank. Both James and
Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following
information pertains to GTE’s 2016 activities.
GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
GTE received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending
GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other
employees (assume these amounts include applicable payroll taxes if any).