How do the all events and economic performance requirement5 apply to the followi
ID: 2814264 • Letter: H
Question
How do the all events and economic performance requirement5 apply to the following transactions by an accrual basis taxpayer?
a. The company guarantees its products for six months. At the end of 2018, customers had made valid claims for $600,000 that \ 'ere not paid until 2019. Also, the company estimates that another $400,000 in claims from 2018 sales will be filed and paid in 2019.
b. The accrual basis taxpayer reported $200,000 in corporate taxable income for 2018. The state income tax rate Vas 6%. The corporation paid $7,000 in estimated state income taxes in 2018 and paid $2,000 on 2017 state income taxes when it filed its 2017 state income tax return in March 2018. The con1pany filed its 2018 state income tax return in March 2019 and paid the remaining $5,000 of its 2018 state income tax liability.
c. An employee \ ,as involved in an accident while making a sales call. The company paid the injured victim $15,000 in 2018 and agreed to pay the victim S 15,000 a year for the next nine years.
Explanation / Answer
Accural basis means income or expenses related to an year is Offered as ioncome/ claimed as expenses inthe same financial year..
this is why we see receivables,payables ,prepaid expenses ,Outstanding expenses etc
A. given in the statement that 600000$ are claims made by the customers which should be paid by the Entity and entity also estimates futher $400000 claims. entity will make a provision for such amount in short term provisions
Total $1000000 would be the liability of the enrity for the year ending 2018
B.The corporatition even though paid the amount of $5000 in march of 2019 while filing its Tax return the amount should be adjusted to the 2018 Revenue account,,it should be deducted from the after tax profits and a short term provision for that payable should be created
C.it was expense related to current year but the liability is deffered over 9 years so expenses should be recognised immediately and it should be paid every as liability
Example
Staff welfare expenses a/c Dr 135000
To Employee 135000
Payment entry
Employee a/c Dr 15000
To Cash/ Bank 15000
Like that until 9 years
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