McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 60

BCS Corporation is a calendar-year, accrual-method taxpayer.BCS was formed and started its business activities on January 1, year 0.It reported the following information for year 0.Indicate BCS's deductible amount for year 0 in each of the following alternative scenarios.a.BCS provides two-year warranties on products it sells to customers.For its year 0 sales, BCS estimated and accrued $200,000 in warranty expense for financial accounting purposes.During year 0, BCS actually spent $30,000 repairing its product under the warranty.b.BCS accrued an expense for $50,000 for amounts it anticipated it would be required to pay under the worker compensation act.During year 0, BCS actually paid $10,000 for workers' compensation-related liabilities.c.In June of year 0, a display of BCS's product located in its showroom fell on and injured a customer.The customer sued BCS for $500,000.The case is scheduled to go to trial next year.BCS anticipates that it will lose the case and accrued a $500,000 expense on its financial statements.d.Assume the same facts as in (c) except that BCS was required to pay $500,000 to a court-appointed escrow fund in year 0.If BCS loses the case in year 1, the money from the escrow fund will be transferred to the customer suing BCS.e.On December 1 of year 0, BCS acquired equipment from Equip Company.As part of the purchase, BCS signed a warranty agreement with Equip so that Equip would warranty the equipment for two years (from December 1 of year 0 through November 30 of year 2).The cost of the warranty was $12,000.BCS paid Equip for the warranty in January of year 1.