Question

Although Hank is retired, he is an excellent handyman and often works part-time on small projects for neighbors and friends. Last week his neighbor, Mike, offered to pay Hank $500 for minor repairs to his house. Hank completed the repairs in December of this year. Hank uses the cash method of accounting and is a calendar-year taxpayer. Compute Hank's gross income for this year from each of the following alternative transactions:

a) Mike paid Hank $200 in cash in December of this year and promised to pay the remaining $300 with interest in three months.
b) Mike gave Hank tickets in December to the big game in January. The tickets have a face value of $50 but Hank could sell them for $400. Hank went to the game with his son.
c) Mike bought Hank a new set of snow tires. The tires typically sell for $500, but Mike bought them on sale for $450.

Answer 1

Under the cash method of accounting, income is generally recognized when received. Here's how Hank's gross income would be computed for each transaction:

a) Mike paid Hank $200 in cash in December of this year and promised to pay the remaining $300 with interest in three months.

- Hank's gross income for this year would be $200. The remaining $300 promised by Mike will be part of Hank's gross income in the year it is received.

b) Mike gave Hank tickets in December to the big game in January. The tickets have a face value of $50 but Hank could sell them for $400. Hank went to the game with his son.

- Since Hank did not sell the tickets, their market value is not considered. Therefore, Hank's gross income for this year from this transaction would be $0.

c) Mike bought Hank a new set of snow tires. The tires typically sell for $500, but Mike bought them on sale for $450.

- The cost of the tires is considered income because it was in exchange for services Hank provided. Therefore, Hank's gross income for this year from this transaction would be $500, which is the typical selling price of the tires.

So, Hank's total gross income for this year would be $200 (from transaction a) + $0 (from transaction b) + $500 (from transaction c) = $700.

Step-by-step explanation:

Answer 2

Hank's gross income for this year from the alternative transactions is as follows: $200 in cash payment from Mike, no gross income from the tickets given by Mike, and no gross income from the new set of snow tires bought by Mike as a gift.

Step-by-step explanation:

Hank's gross income for this year from each of the alternative transactions is as follows:

a) For the $200 cash payment, Hank should recognize $200 in gross income in December of this year. The remaining $300 promised to be paid with interest in three months is not yet received and therefore not included in this year's gross income.

b) The tickets given by Mike have a face value of $50, but Hank could sell them for $400. Since Hank used the tickets and went to the game with his son, there is no cash received or cash equivalent, so there is no gross income.

c) The new set of snow tires bought by Mike for Hank has a typical selling price of $500, but Mike got them on sale for $450. Since Hank received the tires as a gift, there is no cash received and therefore no gross income.