Liabilities in the Case at Term Paper

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Because the $750.00 was given as a donation to the non-profit organization, it will be viewed as an asset. Since the preparation of the tax return was given in exchange for the donation, it is considered a gift and thus not an asset.

Next, one must inquire as to whether the firm of Good and Good's liability should be measured at out of pocket cost, at full costs, or at market value? As has previously been explained, if sued for professional malpractice, the court is most likely to hold Good and Good liable for the full amount of damages to Mr. Pinchpenny that was caused by their professional negligence. Thus, Good and Good's liability is likely to be measured at market value.

The final question that needs to be asked is whether or not any amount in excess of what the firm of Good and Good intended to contribute to the charity event (approximately $450.00) be classified as a loss? Since this contribution was a charitable donation, the average amount for the preparation of a tax return can be written off as a donation.

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However, the amount of time actually spent, which is probably closer to the equivalent of $5,000.00, cannot be classified as a loss. In order to qualify as a loss, the work must be billed to the client as an expense and not paid. Here the client, Mr. Pinchpenny, was not billed anything as the agreement was that he was to receive a free preparation of his personal tax refund.

In the future, the firm of Good and Good should take precautions to prevent this situation from happening again. Because it is good publicity, and thus good for business, to make an annual contribution to the non-profit organization's fundraising event, they should continue to do it (especially if such clients as Mr. Pinchpenny become regular clients as a result of the service). However, in order to prevent a loss such as that in the example, Good and Good should attach qualifications to their donation. For example, their donation could be the free preparation of an individual tax return up to a value of $450.00......

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