Any helpful ideas would be appreciated! Thanks in advance! Jill Peterson is one

Question

Any helpful ideas would be appreciated! Thanks in advance! Jill Peterson is one of several subscribers involved in the process of forming a new company, Pets-Go. She is also in the process of buying a new personal residence. Jill wants to pay the legal fees associated with the purchase of her new home from corporate funds by charging them to the corporation's Organization Costs account. "I'll have the accountant mix them in with the corporation's legal bills. No one will ever notice," says Jill. Pets-Go Company is planning to become a client of Accounting Services, Inc., where you work.. I'm your supervisor, and have asked you to research this issue and to give me your opinion and recommendations. You can assume I have knowledge of the subject area.

Explanation / Answer

First we have to pass adjusting entry to reverse the personal expense from company's legal fee.

Jil Peterson's incured legal fee for acquiring personal residence. It has benn accounted in Company's expenses. It is not a deductable expense for the company. Sice company is already paid the amount we have to reverse it by passing an entry for the amount incured on behalf of her.

     Jil Peterson's advance A/c

               To Legal Fee     A/c

Subsequently company can recover the same from Jil peterson by closing Jil Peterson's advance account.

As per US GAAP the legal fee can be expensed of in the initial year since the future benefit from the formation expense is uncertain

For tax purposes it can be defered and claimed over a period of time.

Jil Peterson can capitalise the legal fee paid for her residential house.

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