BC

BC was formed on February 3, 2013 for the purpose of selling college textbooks in retail
locations in South Florida. It has decided to use the calendar year for its accounting period and
use the modified – cash method (Hybrid) of accounting for tax purposes.
I January 2013 , BC hired attorneys to assist them with corporate filing and CPAs to determine
accounting system/process necessary to begin the business. For those services they paid
$8500.
On February 7, 2013 BC rented three stores from which to sell their products. It entered into
three separate five year commercial leases. Each lease required that in addition to rent, BC
must pay $ 3000.00 during this year as security deposit to be held against any damages caused
by BC, and fully refundable if not ultimately applied at the end of the lease term. BC did not
have to make its first rent payment until April 1, 2013 .

To equip the stores, BC arranged for a loan from the bank for $250000, due in five years and
calling for interest to be paid annually ( on anniversary date) at a rate of 10%. On March 1st,
2013 BC received the loan proceeds and purchased the following items:
1. Shelving units to display the books $ 75,000
2. Office Furniture

$ 50,000

3. Computers & Software

$ 25,000

4. Leasehold Improvements

$ 100,000

BC began operations on April 1st , 2013. During it is first year of operation, BC incurred the
following cas inflows and outflows
1. Gross receipts from sales

500,000

2. Loan proceeds from bank

250,000

3. Book purchased

(425,000)

4. Loan interest

(25,000)

5. Payroll

(125,000)

6. Liability Insurance

(18,000)

7. Key-person life insurance

(1,500)

8. Rent

(63,000)

9. Utilities

(9,000)

10. Advertising

(12,000)

11. Entertainment

(2,500)

12. Licenses & permits

(1,250)

13. Code Enforcement violations

(750)

14. Communications

(6,000)

15. Supplies

(4,200)

As of December 31, 2013 the following information is provided:
a. $25,000 of the sales receipts had not yet been deposited into the bank. It was deposited
on January 3, 2014
b. Management had decided to prepay the 1st year interest on the loan ( due February 28,
2014) on December 2, 2013
c. Management purchased a three year liability insurance policy on March 1, 2013. The
premium covered the thirty –six month period from March 1, 2013 through February 28,
2016
d. Books unsold and on the shelves $ 175,000 ( BC cost)
e. BC purchased the key – person life insurance policy on Jun 15, 2013 to protect company
against losses if their manger dies.

Required:
a. Determine BC’s taxable income. Use MACRS cost recovery (depreciation/amortization)
ignore Bonus Depreciation and Section 179 Expensing for this problem.
b. Prepare a chart / table that shows the cost recovery deduction over the life of the
individual capitalized assets