Joe operates a business that locates and purchases specialized assets for clients. He uses the accrual method of accounting. The problem set determines the effect of various transactions on Joe's taxable business income for the year: 1) A contract to sell gadgets that requires testing has no effect, as income is not guaranteed in the current year. 2) Entertaining a client with no business discussion has no effect, as the expense is not deductible. 3) Paying life insurance premiums on a key employee has no effect, as these premiums are not deductible. 4) Accounts receivable increase income, as Joe cannot deduct amounts he believes may be uncollectible.

1. Running head: WEEK THREE PROBLEM SET 1
Week Three Problem Set
Dawn Church
ACC/547
November 10, 2014
Katherine Castillo

2. WEEK THREE PROBLEM SET 2
Week Three Problem Set
Chapter 8 Question #81
Joe operates a business that locates and purchases specialized assets for clients, among other
activities. Joe uses the accrual method of accounting, but he doesn’t keep any significant
inventories of the specialized assets that he sells. Joe reported the following financial information
for his business activities during year 0. Determine the effect of each of the following
transactions on the taxable business income.
A. Joe has signed a contract to sell gadgets to the city. The contract provides that sales of gadgets
are dependent upon a test sample of gadgets operating successfully. In December, Joe delivers
$12,000 worth of gadgets to the city that will be tested in March. Joe purchased the gadgets
especially for this contract and paid $8,500.
No effect on taxable income. Since Joe's sale is dependent upon a test, there is no guarantee
that he will receive the money. The gadgets that were specifically bought for this contract cannot
be deducted from year 0 because there will not be any income from the contract in year 0. If the
contract goes through and Joe is paid in year 1, then the contract and all the income and expenses
associated with it will go on the year 1 taxes (Spilker, Ayers, & Robinson, 2010).
B. Joe paid $180 for entertaining a visiting out-of-town client. The client didn’t discuss business
with Joe during this visit, but Joe wants to maintain good relations to encourage additional
business next year.
No effect on taxable income. In order to be able to deduct 50% of the meals and entertainment
of business associates, the amount must be reasonable, the taxpayer or an employee must be
present, and the entertainment or meal is either “directly related” or “associated with” the active
conduct of business. Joe paid $180 for entertaining a client, but there was not any business
conducted during that time ("IRS", 2014).
C. On November 1, Joe paid $600 for premiums providing for $40,000 of “key man” insurance
on the life of Joe’s accountant over the next 12 months.
No effect on taxable income. The restrictions do not allow business owners to deduct the cost
of life insurance premiums paid for policies on key employees. If the employee died, the death
benefit is not taxable, so the premiums paid cannot be deducted from taxable income. The $600
premium paid for a life insurance policy for Joe's accountant is not deductable (Spilker, Ayers, &
Robinson, 2010).
D. At the end of the year (year 1), Joe’s business reports $9,000 of accounts receivable. Based
upon past experience, Joe believes that at least $2,000 of his new receivables will be
uncollectible.
$9,000 increase in income. The receivables will be reflected as sales that will increase the
income. There will not be any dollar amount deducted for the receivables that Joe thinks will be

3. WEEK THREE PROBLEM SET 3
uncollectible. In order to be able to deduct for uncollectable accounts receivables, the debt has to
become worthless during the tax year. Since Joe only thinks that $2,000 of his new accounts
receivables will be uncollectible, he cannot deduct this amount from his taxable income (Spilker,
Ayers, & Robinson, 2010).
E. In December of year 0, Joe rented equipment for a large job. The rental agency required a
minimum rental of three months ($1,000 per month), but Joe completed the job before year-end.
Reduce the taxable income in year 0 by $1,000. The $3,000 cost of the lease will be spread
out over the course of the lease terms, so only $1,000 for December will be able to be deducted
during year 0. The other $2,000 will be deducted during year 1 for the months of January and
February since Joe uses the accrual method of accounting (Spilker, Ayers, & Robinson, 2010).
F. Joe hired a new sales representative as an employee and sent her to Dallas for a week to
contact prospective out-of-state clients. Joe ended up reimbursing his employee $300 for airfare,
$350 for lodging, $250 for meals, and $150 for entertainment. Joe requires the employee to
account for all expenditures in order to be reimbursed.
Reduce the taxable income by $850. Since the sole purpose of the trip was business, and the
sales representative was out of town overnight, Joe can deduct the expenses related to the trip
from his taxable income. He can deduct $300 for airfare, $350 for lodging, $125 ($250 x 50%)
for meals, and $75 ($150 x 50%) for entertainment. The most that is allowed to be deducted for
both meals and entertainment is 50%. In order for Joe to be able to deduct this amount the sales
representative had to keep all receipts as proof of payment, and Joe had to reimburse her
("IRS", 2014).
G. Joe uses his BMW (a personal auto) to travel to and from his residence to his factory.
However, he switches to a business vehicle if he needs to travel after he reaches the factory. Last
month, the business vehicle broke down, and he was forced to use the BMW both to travel to and
from the factory and to visit work sites. He drove 120 miles visiting work sites and 46 miles
driving to and from the factory from his home.
Reduce the taxable income by $67.80. The 46 miles that Joe drives from his home to the
factory are considered personal, and they cannot be deducted from his income. The 120 miles
that he drove from the factory visiting work sites is deductable. The amount is calculated using
the standard mileage rate for 2013. The standard mileage rate for 2013 is 56.5 cents a mile for
business use. To find Joe's amount you multiply the 120 miles by 56.5 cents ("IRS", 2014).
H. Joe paid a visit to his parents in Dallas over the Christmas holidays. While he was in the city,
Joe spent $50 to attend a half-day business symposium. Joe paid $200 for airfare, $50 for meals
during the symposium, and $20 on cab fare to the symposium.
Reduce the taxable income by $95. Since the main purpose of Joe's trip is personal and not
business, he cannot deduct the cost of traveling to Dallas. He can deduct the $50 cost of the
registration for the symposium, $20 cost of the cab fare to get to the symposium, and $25 for

4. WEEK THREE PROBLEM SET 4
meals while there. He is allowed to deduct 50% of the cost of meals for business trips, so since
he spent $50 on meals he can deduct $25 ("IRS", 2014).

5. WEEK THREE PROBLEM SET 5
References
IRS. (2014). Retrieved from http://www.irs.gov
Spilker, B. C., Ayers, B. C., & Robinson, J. R. (2010). Taxation of Individuals and Business
Entities. Retrieved from The University of Phoenix eBook Collection.