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Taxation: for each problem, calculate the taxable amount.

1. Mr. Z, a nondealer, sold assets on an installment plan. Determine Mr. Z's gross income for 2008. Relevant data include:

Year Installment sales Gross profit 2008 collections
2008 $200,000 50,000 25,000
2007 300,000 81,000 80,000
2008 400,000 96,000 125,000

2. Tom is a cash-basis, calendar year taxpayer. Which of the following December items result in gross income or deductions for the current year?

A. Check received for December rent, $700 not deposited until January 4.

B. Check for $1,100 to pay Tom's state income taxes mailed Dec 28, cashed Jan 7.

C. Cash received in the amount of $500 for services to be rendered the following year.

D. Interest of $800 credited to his savings account, added to Tom's account balance.

E. Check received for Jan rent, $700 deposited on Jan 9.

F. Charitable contribution of $300, charged to mastercard.

G. Tom's totaling $2,000 sent for services rendered during the year, uncollected as of year-end.

Solution Preview

1. First we calculate the gross profit percentages for each:
2008 = 50,000/200,000 = 25%
2007 = 81,000/300,000 = 27%
2008 = 96,000/400,000 = 24%

We calculate the amount that will be taxable based on 2008 collections for installment sales based on the gross profit percentages:
2008 = 25,000 x 25% = ...

Solution Summary

The solution shows the calculations, as necessary, for each of the problems together with an explanation to support the answers.

$2.19