Question

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance (500 per year), or two years in advance (950). In September 2015, the company collected the following amounts applicable to future services:

October 2015-September 2017 services (two-year contracts) 144,000
October 2015-September 2016 services (one-year contracts) 128,000
Total 272,000
As a result of the above, Orange Cable should report as gross income:
1) 272,000 in 2015.
2) 128,000 in 2015.
3) 168,000 in 2016.
4) 222,000 in 2016.

Answer 1

The Orange Cable TV Company should report a gross income of $222,000 in 2016.

Step-by-step explanation:

The Orange Cable TV Company should report a gross income of $222,000 in 2016.

To calculate the gross income, you need to consider the amounts collected applicable to future services. In this case, the company collected $144,000 for two-year contracts (October 2015-September 2017 services) and $128,000 for one-year contracts (October 2015-September 2016 services), which adds up to a total of $272,000.

Since only the services from October 2015 to September 2016 ($128,000) will be recognized as income in 2015, the remaining services from October 2016 to September 2017 ($144,000) will be recognized as income in 2016, resulting in a total gross income of $272,000. However, $50,000 of the two-year contract amount ($144,000) was collected in advance in 2014, so it will not be reported as income in either 2015 or 2016. Therefore, the gross income that should be reported in 2016 is $272,000 - $50,000 = $222,000.

For the year 2015, Orange Cable should recognize the revenue that corresponds to the services provided during that year. Since both the one-year and two-year contracts cover services from October 2015, the total revenue recognized in 2015 would be the sum of the amounts related to the one-year contracts: