How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask BK-CPA Your Own Question

BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 808
Experience:  Owner of a CPA firm
36384704
Type Your Tax Question Here...
BK-CPA is online now
A new question is answered every 9 seconds

There was a Deferred Compensation of 30K in Balance Sheet Liabilities

Resolved Question:

There was a Deferred Compensation of 30K in Balance Sheet Liabilities side and Salary Expenses in Profit & Loss which already existed in pervious year.

Now in current year the officer whose salary was deferred above generated a loss of 40K (loss of sale) due to misconduct. The company decided to write off the deferred Salary against loss. How to pass the entry and if the company simple decided to write off liability of deferred Salary how to pass the entry in both the case? Your prompt response is appreciated.
Submitted: 4 years ago.
Category: Tax
Expert:  BK-CPA replied 4 years ago.

There are two different transactions here, so we'll take them one at a time.

 

For the income that was lost due to officer misconduct: If the income had already been earned by the company (and recorded as a receivable), then there would be a new entry to record the loss of income when the loss occurred. If the income had not yet been earned, and the partner simply cost the company from earning more revenue as opposed to costing the company revenue it had already earned, then there is no entry with respect to the revenue. The company simply didn't earn any revenue in the later circumstance, so there is nothing to record.

 

For the deferred compensation reduction: The reduction in the liability is something that is unusual in nature and not frequently occurring (hopefully, yuk yuk), so it's not going to run through your regular cost of sales or general and administrative expenses. That is to say, set up a new account on your trial balance for it (other revenue account). You would recognize income, however, depending on your chosen body of accounting principles, etc. That means, if you're reporting to a bank and you're using GAAP this is going to get disclosed, but if your reporting is for internal purposes only, then you can take what you will from the transaction.

 

 

Tax Considerations:

 

For tax purposes, deferred compensation generally results in book/tax differences, so you won't be generating taxable income as you likely didn't generate any tax deduction in recording the initial deferred compensation liability in previous years.

 

The loss of revenue would likely function the same way for tax purposes as book purposes, save some cash/accrual accounting considerations, etc.

 

 

 

I assume this answers your question. Thank you.



Edited by BK-CPA on 5/1/2010 at 2:50 PM EST
Customer: replied 4 years ago.

So in short it means

 

1: No entry for Sales since it's not actually earned or realized which will be same for tax purpose and internal management review.

2: And the entry for deferred compensation reversal will be:

Reducing that officer's deferred compensation from Liability Balance Sheet Side 30K against 30K for extraordinary gains under Other Income. Company was already in loss let say 50K before and now it would be overall 20K loss. So overall effect for income tax would be 20k loss and also for management presentation correct? The remaining 10 K difference from 40K loss - 30 K deferred reversal will be adjusted as accounts receivable from the Officer personal in Balance sheet Asset side?

 

Your clarification is very much appreciated.

Expert:  BK-CPA replied 4 years ago.

1. Sounds good.

 

2. This sounds good: "Reducing that officer's deferred compensation from Liability Balance Sheet Side 30K against 30K for extraordinary gains under Other Income. Company was already in loss let say 50K before and now it would be overall 20K loss."

 

Make sure I understand this (sorry): "The remaining 10 K difference from 40K loss - 30 K deferred reversal will be adjusted as accounts receivable from the Officer personal in Balance sheet Asset side?".... I get the loss was 40K from the officer then, not 30K, in which case there is an additional 10K officer receivable that will appear on the balance sheet after writing off the 30K payable, yes. Here is the entry in that case:

 

Liability debit for 30K

Receivable debit for 10K

Other income credit for 40K

 

Overall change in income = 40K

 

Overall change in income for tax purposes = 10K

Again, this is because deferred compensation expense is generally deducted when paid, not accrued, for tax purposes. You most likely had no deduction in the past when you put the 30K deferred comp liability on the balance sheet (book/tax difference). The 10K, above and beyond the deferred compensation liability, would have to be recognized as income. Essentially, the deferred compensation is getting paid and remitted to the company, not canceled per se. There is the 30K deduction for paying the deferred comp and the 30K in income from the officer that will wash, hence creating the 10K left over.

 

If you have a set of financials that are being reported on then by an external CPA, they'll help you classify this on an income statement before they sign the report (I would personally look more closely into whether I would describe this as other income, or extraordinary income, if signing the report). For your internal purposes or working with your CPA, you know plenty now...

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 808
Experience: Owner of a CPA firm
BK-CPA and 3 other Tax Specialists are ready to help you
Customer: replied 4 years ago.

Excelllent response and very statisfactory. I highly appreciated your time. Thank you.

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.