Accounting homework

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john gassette (Querist)
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17 May 2020 Alice J. and Bruce M. Jones are married taxpayers who file a joint return. Alice’s
birthday is September 21, 1961, and Bruce’s is June 27, 1960. Bruce is the office
manager for Ames Dental Clinic. Alice is the CPA at Lehman, York & Hunter CPA, LP.
The Jones provide over half of the support of their two children, Cynthia (born
January 25, 2001, Social Security number (017-44-9126) and John (born February 7,
1999, Social Security number (017-27-4148), who live with them. Both children are fulltime students and live with the Jones. The Jones also provided all the support for their 22-
year-old son Ryan who recently graduated college but cannot find employment. Ryan
lives in DC.
According to Mr. Jones on May 31, 2018, he and his wife exchanged their twofamily house in Westchester County (675 Pinebrook Blvd, New Rochelle, NY), which
they rented entirely from January 01, 2014 to May 31, 2018, for a four family rental
property located at 62 Atlantic Avenue, Brooklyn, NY. At the time of the exchange, the
FMV of the two-family house was $900,000, and the adjusted basis was $???????
(Calculate based on information provided below). The Four-family house had an adjusted
basis of $150,000 and a FMV of $890,000. The two-family home was subject to a
$10,000 mortgage, which the buyer assumed.
The Jones also owned and rented a two-unit commercial retail building located at
1560 Avenue A, New York NY, which they purchased on November 01, 2017 and placed
in service on January 01, 2018. Information for all three of the rental properties is listed
below.
In April 2018, Bruce decided to start his own business; a retail bicycle shop to be
located in NYC near Central Park called “Bruce’s Bikes.” On April 20, 2018, Bruce
signed a 10-year lease at a monthly rental rate of $10,000, effective May 01, 2017, for
retail space on 110th Street and CPW. The lease provided that Bruce was responsible for
the costs of improving the retail space for its intended use. The terms of the lease also
provided that the first three months were rent-free so that Bruce could complete the
construction needed to operate a retail bike shop. When Bruce executed the lease he paid
the landlord $20,000 as a security deposit. On May 01, 2018, Bruce paid a contractor
$200,000 to provide all construction work relating to the build-out, which included
electrical, plumbing, and carpentry. On July 01, 2018, Bruce purchased the following
assets for the business:
Equipment $ 45,000
Furniture & Fixtures $ 20,000
Computer Equipment $ 12,750
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Although Bruce planned on a grand opening on July 01, 2018, the construction
was not completed until July 21, 2018, causing Bruce to delay the grand opening until
August 01, 2018.
On August 01, 2018, Bruce purchased a new truck for $26,000, which weighs
6,850 pounds, to be used 100% in the business for pickups and deliveries.
Bruce planned to finance the new business with the $50,000 inheritance he
received on 05/01/2018, from his late father’s estate. Bruce also planned to use $100,000
of savings he had invested with Madoff Investment Securities (MIS) but learned on
3/29/2018, that his entire savings was lost as a result of a massive ponzi scheme, which
was not covered by any insurance. In order to come up with the additional funds needed
to finance the construction, equipment, and inventory, Bruce’s grandfather loaned him
$75,000 on 07/15/2018. On December 30, 2018, Bruce received a letter from his
grandfather stating that he forgives the entire $75,000 loan effectively immediately.
For 2018, the bike shop generated the following revenues and incurred the following
expenses:
Sales, Rental, & Service Revenue $ 355,000.00
Inventory purchased 200,000.00
Inventory on hand at December 31, 2018 125,000.00
Rent from (August 01 – December 31, 2018) 50,000.00
Salaries 30,000.00
Supplies 14,500.00
Utilities 4,000.00
Promotional expense 5,25000
Travel to Trade Shows 3,000.00
Meals & Entertainment 1,600.00
Postage and Delivery 1,900.00
Telephone 2,850.00
Attorney fees 8,000.00
Pre-startup investigative expense 51,000.00
Other relevant information:
• Bruce has decided that he wants to minimize his tax as much as legally
possible and has requested your assistance in preparing his 2018 Federal
income tax return.
• Bruce has asked you to depreciate as much of the capital expenditures as
legally possible, but does not want to use IRC Sec 179 or first year bonus
depreciation.
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• On March 15, 2018, York Technology Inc. filed for bankruptcy resulting in a
total loss for its’ only two shareholders. Bruce and a friend founded the
company on July 15, 2016, with each owning 50% of the outstanding shares.
Both Bruce and his friend each initially contributed $20,000 in exchange for
their 50% interest in the company.
• Bruce and Alice earned $1,200.00 interest income from savings in 2018.
• Bruce earned $2,250 in interest income from US Treasury Bonds in 2018.
• On October 18, 2018, Bruce received $3,500 of dividend income from JP
Morgan Chase Stock, which he purchased on September 01, 2018.
• On November 15, 2018, Bruce sold some of his JP Morgan Stock for $80,000,
which he purchased on July 01, 2017 for $55,000.
• Bruce was named as the sole beneficiary on his late mother’s life insurance
policy, and on December 31, 2018, Bruce received a check for $75,000 from
the insurance company, which he held and deposited on January 02, 2019.
• On June 13, 2018, Bruce sold 1,000 shares Citibank Stock for $40,000. He
purchased the stock on July 17, 2017 for $75,000.
• On November 04, 2018, Alice received a settlement award for injuries
sustained in 2017. The settlement award included the following amounts:
o Reimbursement of medical expenses which were not deducted on previous
tax returns $12,500
o Loss income $15,000
o Punitive damages $20,000
o Compensatory relating to a broken leg $18,000
• On November 03, 2018, Bruce determined that a personal loan to a friend was
uncollectible because his friend had recently and unexpectedly died. The
amount of the loan was $7,500.
• Bruce collected $4,500.00 per month for six months (July – December) in
rental income on 62 Atlantic Avenue. For 2018 Bruce paid mortgage interest
of $9,500 and real estate taxes of $7,200.00. Bruce paid no other expenses in
2018 for 62 Atlantic Avenue. The property was placed in service on July 01,
2018.
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• Other Rental Income and Expenses for 2018 included:
Pinebrook Property Avenue A Property
Rental Income $37,000.00 $100,000.00
Mortgage Interest Expense $10,000.00 $15,500.00
Real Estate Taxes $4,000.00 $12,000.00
Utilities $3,500.00 $6,500.00
Insurance $1,750.00 $4,000.00
Water & Sewer $1,300.00 $4,200.00
Place in Service 01/01/2014 01/01/2018
Purchase Price $475,000.00 850,000.00
• Bruce and Alice 2018 W-2 statement shows the following wages and
withholdings:
Alice Bruce
1) Wages $55,000 $62,000
2) FWT 8,000 9,500
3) SWT 3,000 4,500
4) CWT 1,500 2,900
• The Jones also paid the following personal expenses in 2018:
a. Contributions to Museum of Modern Art (a 50% Organization):
i. Cash $38,000
ii. JP Morgan Chase Stock -FMV $65,000
(Long Term) -A/B $26,000
b. Real Estate Taxes on primary residence $12,250
c. Mortgage Interest on primary residence $14,000
d. Student loan Interest $3,500
Instructions: Make realistic assumptions about any missing or inconsistent data and state
your assumptions on a separate typed schedule.
Required:
i. Prepare form 1040, including all schedules and forms for 2018. (Do not prepare
NYS or NYC tax returns).
ii. Taxpayers does not want to use the Reduce Deduction Election for charitable
donations.
iii. All work must be typed onto approved IRS forms (no hand written forms will be
accepted).
iv. Read chapter 8 to determine how to handle depreciation/amortization.
v. Only hand in the appropriate forms and schedules.
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