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

side and Salary Expenses in...
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.
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Answered in 7 hours by:
5/1/2010
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
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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
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Customer reply replied 7 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.

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
BK-CPA, Certified Public Accountant (CPA)
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Customer reply replied 7 years ago

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

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BK-CPA
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