Income Tax Fundamentals 2020
38th Edition
ISBN: 9780357391129
Author: WHITTENBURG
Publisher: Cengage
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Chapter 3, Problem 5P
Business with gross receipts of $25 million or less may treat inventory as nonincidental materials and supplies. Find Regulation Section 1.162-3 and read paragraphs (a)(1) and (a)(2) to help answer the following:
Frank owns an auto repair shop that serves a particular model of auto and so he tends to purchase parts in bulk. Frank is eligible to treat inventory as non-incidental materials and elects to do so. In December of 2019 he purchases 24 oil filters. He uses one to repair an auto in January 2020, and then about 2 per month and ends 2020 with 14 filters. Explain how Frank will treat his oil filter inventory.
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Alpha company is a trading company that purchases and sales fruits and vegetables. During the year 2020, the company shows the following transactions and events:
Net profit is computed by subtracting operating expenses from the cost of goods sold.
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Required:
For each case, identify the anomaly and propose the correct accounting treatment/answer:
Alpha company is a trading company that purchases and sales fruits and vegetables. During the year 2020, the company shows the following transactions and events:
The company assumes the freight charges to its customers. The accountant debit (freight in expenses) and credit (merchandise inventory).
One customer returned fruits to Alpha that were damaged. The accountant of the company debit (purchase returns) and credit (accounts payable).
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At the end of 2018, the Biggie Company performed its annual physical inventory count. John Lawrence, themanager in charge of the physical count, was told that an additional $22,000 in inventory that had been sold andwas in transit to the customer should be included in the ending inventory balance. John was of the opinion that themerchandise shipped should be excluded from the ending inventory since Biggie was not in physical possessionof the merchandise.Required:Discuss the situation and indicate why John’s opinion might be incorrect.
Chapter 3 Solutions
Income Tax Fundamentals 2020
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