Kaps Warehouse, Inc. - Page 9

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           Petitioner's Certified Public Accountant                                                   
                 Philip Lamprecht of Jordan & Co. was petitioner's accountant.                        
           Mr. Lamprecht recommended the amount of the rebates to be given to                         
           each of petitioner's related stores.    In  making  his                                    
           recommendations, which was done after consulting M. Kirkham,  Mr.                          
           Lamprecht considered the profitability of petitioner and its                               
           related entities.  He treated all the entities as one business                             
           operation.  In addition, Mr. Lamprecht analyzed the liquidity of                           
           each of the related stores and the related stores' ability to pay                          
           their receivables.  He took that ability into consideration in                             
           determining the amount of the rebate to be given to each store.                            
           Petitioner's Bookkeeping                                                                   
                 Petitioner and the related entities employed the accrual                             
           method of accounting. Petitioner booked sales to both related and                          
           unrelated entities when the merchandise was delivered, debiting                            
           accounts receivable and crediting sales.  Petitioner's related                             
           stores accounted for the delivery of petitioner's merchandise to                           
           the stores by crediting an account payable to petitioner and                               
           debiting purchases.                                                                        
                 Petitioner accounted for the rebates by crediting accounts                           
           receivable and debiting sales, thereby eliminating the amount of                           
           the rebate from accrued sales for Federal income tax purposes.                             
           Petitioner's related stores to which the rebates were given                                

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Last modified: May 25, 2011