Chapter 3 HW Solutions

Chapter 3 HW Solutions - 3 Accounting Methods Solution...

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3. Accounting Methods Solution: Murphy should recognize the income in year 1. The check was readily available several days before the end of the year and, as a cash-basis taxpayer, Murphy cannot turn its back on the income by failing to pick up the check. 6. Assignment of Income Solution: Ryan’s gross income is $120,000. He earned the income and he is responsible for including it in his taxable income. He will be treated as making a gift of the $20,000 to his grandmother. 9. Original Issue Discount Solution: Martha must include the $840 of accrued interest in her income. The bonds were issued with original issue discount and this must be accrued even by a cash-basis taxpayer. 22. Prepaid Rental Revenue Solution: a. For tax purposes Realty will recognize $6,000 ($3,000 x 2 months rent) income in year 1 because prepaid income is taxed when received for both cash and accrual basis taxpayers. For financial accounting no income will be recognized in year 1. b. For tax purposes, Realty will recognize $8,500 ($3,000 March rent + $3,000 April rent + $2,500 kept from deposit) income in year 2. For financial accounting, Realty will recognize all $14,500 as income in year 2. (Note that a deduction would be allowed for the costs to repair the damages.) 24. Municipal Bonds Solution: Carl recognizes gain of $3,000 ($43,000 - $40,000) on the sale of the stock. The interest is nontaxable because these are municipal bonds. 25.
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Chapter 3 HW Solutions - 3 Accounting Methods Solution...

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