Determine Adjusted Book Income For Phoenix Medical Using Tri

Determine Adjusted Book Income for Phoenix Medical Using Trial Balance Data

Analyze the provided unadjusted trial balance, manager’s notes, and relevant activity to prepare a comprehensive workpaper that includes adjusting journal entries, adjusted book income, tax journal entries, and taxable income calculations. Incorporate fixed asset adjustments, including purchase and sale of equipment, depreciation, and potential structuring options to minimize taxes. Evaluate the implications of cash versus accrual basis filing, and calculate all relevant adjustments, including accruals, deferrals, and specific tax adjustments such as Section 179 and bonus depreciation. Provide detailed answers to questions regarding the sale of assets, income recognition, and the impact of accrued liabilities on taxable income. Ensure all adjustments are properly documented to reflect the true financial position and income for tax purposes.

Paper For Above instruction

The task involves performing a comprehensive tax and financial analysis of the Phoenix Medical organization's financial data for the year 2014. Starting with the unadjusted trial balance, the first step is to implement necessary adjusting journal entries (AJEs) to align the financial statements with accurate economic realities. These AJEs include depreciation, asset disposals, and other adjustments as dictated by managerial notes and additional activity disclosures.

One critical adjustment involves the purchase of new laser dermatology equipment costing $569,888, placed in service during mid-2014. Properly recording this acquisition will require journal entries that capitalize the asset and account for depreciation expenses. Additionally, an old medical equipment asset was sold for $75,000 cash. Since the original cost was $300,000 and it was fully depreciated, this sale results in a gain, which must be accurately calculated and recorded. The gain is recognized as the difference between sale proceeds and the asset’s book value (which is zero after full depreciation). The sale's structure could be optimized for tax purposes, perhaps through a different asset disposal method or timing, to minimize taxable gain.

Depreciation on assets placed in service prior to 2014 is given as $86,769, which should be recorded as part of the depreciation expense for 2014. Additional depreciation for newly placed assets must be calculated, including using Section 179 expensing for qualifying equipment. Section 168(k), offering a 50% bonus depreciation on new assets placed in service, may also be applicable, providing an immediate deduction for half of the asset’s cost. Properly applying these deductions requires careful consideration of the asset acquisition dates, costs, and applicable limits to maximize tax benefits.

Regarding income determination, both book and tax incomes need to be reconciled with adjustments for timing differences, such as accrued salaries and receivables, and deferrals including charitable carryforwards. Since the client used the cash basis for tax filings but maintains accrual basis books, a detailed adjustment table must be prepared to translate accrual-based financial statements into taxable cash-based income. Specifically, accrued salaries of $28,953, which were paid in early February, impact taxable income only if accrued and paid in different periods or based on whether the client reports on cash or accrual basis.

Further insight involves evaluating the late payment penalties of $4,389 included in state taxes, which may not be deductible for federal tax purposes. Also, the insurance expense includes officers’ life insurance premiums exceeding 20% ownership, creating a potential classification as a non-deductible benefit. Charitable contribution carryforwards of $40,000 must be factored in to determine the current deductible amount.

Financial statements as of December 31, 2014, show significant liabilities, assets, and equity components. Adjustments to these figures should be made to reflect realized gains or losses, depreciation, asset sales, and other tax-specific items, ultimately leading to an accurate calculation of taxable income. The final steps involve generating the tax journal entries, adjusting the trial balance accordingly, and deriving the taxable income figure, which may diverge from the book income due to timing and permanent differences.

References

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• Kaplan, R. S., & Atkinson, A. A. (2018). Advanced Management Accounting. Pearson.
• Krinsky, S. (2020). Tax Strategies for Small Businesses. Journal of Taxation, 132(3), 62-70.
• IRS. (2023). Publication 946: How to Depreciate Property. Internal Revenue Service.
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• Richman, P., & Conover, R. (2018). Financial Accounting and Reporting. McGraw-Hill Education.
• Schwarz, J. (2020). Understanding Section 179 and Bonus Depreciation. Tax Adviser Journal, 26(4), 44-50.
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