15 May WHICH OPTION WOULD YOU RECOMMEND FOR THE CLIENT?
You are currently working at a mid-sized certified
public accounting firm. Your client is Bob Jones. Bob, age 60 and single, has
recently retired from IBM. He has $690,000 available in his 401(k) fund and he
is thinking of using that money to open a used car business that will be
located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that
the business might make $300,000 in taxable income. Bob’s personal wealth
including investments in land, stocks, and bonds is about $14,000,000. He reported
an interest income of $20,000 and dividend income of $6,000 last year. The
$14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for
$450,000. Bob has hired your firm for professional advice regarding whether he
should operate as a sole proprietor, a partnership, an S corporation, or a C
corporation. He is also considering transferring a possible 40% interest in his
new business to his daughter Mandy, age 23 and single.
Specifically,
the following critical elementsmust be addressed:
A. Differentiate between accrual accounting and cash
basis. Based on the type of business and the client’s accounting system, what
is the impact when revenue is recognized? Which option would you recommend for
the client?
B. Based on
the decision of accrual vs. cash basis, describe when
revenue would be recognized on the sale of inventory, and how the accrual
reporting differs from cash basis.
C. Determine the economic impact on the client’s
financial situation. Based on your decision, determine the potential tax
liability, keeping in mind appropriate IRS code and regulations.
D. Summarize, using moral reasoning, the cash or
accrual accounting method in relation to the selected business entity (Sole
Proprietorship)
Guidelines
for Submission: Your paper must be submitted as a 2–3-page Microsoft Word
document with double spacing, 12-point Times New Roman font, oneinch margins,
and at least three sources cited in APA format.
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