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3. From the following information taken from the single entry set of books of John Valley, you are required to prepare an Income Tax Return for the current calendar year.

Mr. Valley is a married man, but has no children.

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Accounts Payable
Trade Creditors..

$ 1,643.13
Expense Bills....

939.43 $ 2,582.56 Notes Payable.

1,400.00 Accrued Taxes..

2,514.22 Accrued Indust. Ins. (Est'd).

20.00 Accrued Interest..


$ 6,555.78

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Other Data (Applicable to Current Year) Cash on hand (end of year).

$23,039.54 Accounts Rec.

20,927.85 Notes Rec.

6,178.20 Mdse. Inv.

24,040.37 Real Estate Contracts: Adams.

$ 500.00 Baker.

1,068.83 Fry....


2,943.83 Factory Land Purchased for

Shop Tools and Equipment valued as on Dec. 31, (preceding year)
Liberty Bonds on hand Dec. 31 (No stock).

Write off 3% depreciation on all buildings.
Write off 10% depreciation on Store Fixtures and Office Equipment.
Launch sold for $600.00 which did not appear in Balance Sheet

as of December 31 (preceding year). Unexpired Insurance (Apartment House)..

60.00 Accounts Payable December 31: Trade Creditors..

9,294.33 Expense Bills (Business).

651.95 Wages..

312.12 Industrial Insurance (Business)

30.00 Interest (Business).

150.00 Notes Payable December 31.

6,147.90 Mortgage Payable December 31.

5,000.00 Accrued Taxes, December 31

2,933.25 Net Sales for the year....

191,805.80 Apartment House Income (Collected)

12,029.45 Garage Income (Collected)..

1,620.00 Other Rental Income (Collected).

132.00 Interest Income (Notes) (Collected).

333.II Profit from sale of Bank Stock...

300.00 Fees received as Director of Bank.

80.00 Income from joint venture...

52.59 Interest Income (Tax exempt securities)

112.88 Proprietor's Personal Drawings.

4,274.52 Bad Debts written off.

668.91 Set up Reserve for Doubtful Accounts

(Concluded on page 148)

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Cash disbursements for year:
Income Tax for preceding year.

$ 2,643.32 To Trade Creditors..

135,955.68 For Freight-In..

13,621.16 For Insurance (Business).

$ 440.86 For Insurance (Apartment House)..


500.85 For Interest (Business)..

$ 177.15 For Interest (Garage).


541.95 For Salaries and Wages (Business)..

$14,756.74 For Salaries and Wages (Apt. House)

1,080.00 15,836.74 For Taxes (Distribution as below)....

2,454.49 For Other Expenses (Distribution as below)

6,500.61 For Donation to Red Cross......

25.00 Expenses should be distributed as follows: (Items other than

Insurance, Interest, Salaries).
Apartment House:


876.00 Repairs..

102.75 Telephone.

105.00 Water..

353.00 Lights.





Delivery Expense.

3,791.18 Advertising

25.00 Office and Miscellaneous Store Expenses.. 550.00

(Note. (a) To compute the industrial insurance for the year, it is necessary to take into consideration that the amount paid, $440.86, includes the estimated accrued industrial insurance of $20.00, per statement on the Balance Sheet at December 31 of the previous year; hence the current fiscal period should be charged with the difference, or $420.86 plus the amount accrued to December 31 of the current year, $30.00. This makes a total charge to Industrial Însurance of $450.86.

(b) The problem states that the cash disbursements for taxes during the year amounted to $2,454.49. In the distribution, the total will be found to be $2,873.52 as follows: Apartment House.

$1,469.29 Garage..

381.50 Home.

41.00 Business.




This distribution takes into consideration the actual amount of taxes chargeable to the fiscal period while the $2,454.49 represents the cash disbursements for taxes during the year. Of course, the amount disbursed does not include the accruals. Accrued taxes, per Balance Sheet, at end of the previous year were $2,594.22. Accrued taxes at end of the current year are $2,933.25, hence there is an increase in the accrued taxes of $419.03. This should be added to the cash disbursements in order to arrive at the total amount of taxes applicable to the current fiscal period.)

4. G. W. Hinman filed an Income Tax Return and reported a net income for the current year of $18,994.97 on which he paid a tax of $254.15. An office audit of the return revealed some discrepancies, hence the local Collector of Internal Revenue was directed to have the books audited. This audit revealed the following information: Income Not Reported: Additional Salary Received...

$ 1,450.00 Commissions Received...

14,553.09 Profit on Sale of Stock.

56,796.18 A bad debt amounting to $297.00 which had

been claimed as a deduction was disal

lowed. You are asked to prepare a corrected Statement of Income and compute the additional tax to be assessed for the year. In computing the normal tax, the following credits should be deducted from net income. Personal Exemption..

$ 2,500.00 Dividends..

12,777.31 A penalty of 50% of the additional tax assessed should be added for filing a false and fraudulent return.

5. The A. B. C. Co. agreed to pay its general manager a bonus of 10% of its net profits per year, after deducting Federal income taxes, the bonus being a deductible expense in determining the net taxable income. After the books had been audited, it was found that the net profits before deducting the Federal income tax, and before deducting the bonus, amounted to $470,000.00.

Calculate the amount of the bonus and Federal income tax, proving your answer by showing that the bonus amounts to exactly 10% of the profits after deducting the Federal income tax.

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