D & B Enterprises is a cah basis taxpayer who makes widgets. It sell the widget

ID: 2539272 • Letter: D

Question

D & B Enterprises is a cah basis taxpayer who makes widgets. It sell the widget for $500,000 in gross receips through December 2012. The company also received $200,000 from a life insurance policy that it received after the death of Russell, it's chief financial officer. Then on December 28, it recives payment in the amount of $100,000 for an order of widgets which it sent to the customer on December 20. Avon, the CEO, cashes the check on January 3 and then on January 7 uses it for payroll. The company also has an investment account that has $100,000 invested in State bonds which earned $3,400 in interest during the year. Avon comes to you regarding his 2012 tax liability and ask you what his taxable income is and why?

Explanation / Answer

Tax liability of D&B Enterprise

Particulars

Amount ($)

Sale of widgets

500000

Add: Eligible income for tax purposes

Life insurance policy received is not taxable income in this case

Amount received from customer

100000

Interest earned on investment

3400

Taxable income

603400

Tax liability @30%

181020

(603400 X 30%)

Note:

Since, the company follows cash basis of accounting for tax purpose and assuming that it is allowed to do that thus, only the cash receipts and payments which have been made during the period between 1st January, 2012 and 31st December, 2012 have been considered for determination of tax liability of the company for the year 2012. All the incomes and expenditures received and paid after 31st December, 2012 have been ignored.

Since Avon is the Chief Executive Officer of the company it has been assumed that though the question has asked to ascertain his tax liability, here his has been assumed to be the company.