Jill Peterson is one of several subscribers involved in the process of forming a

Question

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. This is a business memo and you will not reference the instructor, student, any textbook, or assignment. Keep this memo in a business context. Make sure to list the references (web addresses) you used to form your opinion. The reference needs to be within the memo not listed at the end of the memo.

Explanation / Answer

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

Jil Peterson's incurred legal fee for acquiring personal residence. It has been accounted in Company's expenses. It is not a deductible expense for the company. Sice company is already paid the amount we have to reverse it by passing an entry for the amount incurred 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.

According to US GAAP the legal fee can be used of in the initial year since the future advantage from the formation expense is uncertain

For tax purposes it can be deferred and claimed over some stretch of time.

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

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