Question

Maroon Corporation expects the employees' income tax rates to increase next year. The employees use the cash method. The company presently pays on the last day of each month. The company is considering changing its policy so that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2015?

1) The employee would be required to recognize the income in December 2015 because it is constructively received at the end of the month.
2) The employee would be required to recognize the income in December 2015 because the employee has a claim of right to the income when it is earned.
3) The employee will not be required to recognize the income until it is received, in 2016.
4) The employee can elect to either include the pay in 2015 or 2016.
5) None of these.

Answer 1

The effect on an employee of the change in company policy for paying salaries would be that the employee will not be required to recognize the income until it is received in 2016.

Step-by-step explanation:

The effect on an employee of the proposed change in company policy for paying its salaries beginning December 2015 would be that the employee will not be required to recognize the income until it is received, in 2016. This is because the employees use the cash method and the income would not be constructively received or subject to recognition until it is actually paid to the employee. Therefore, the correct answer is option 3) The employee will not be required to recognize the income until it is received, in 2016.

The employee will not be required to recognize the income until it is received, in 2016. The other options are incorrect because they pertain to the accrual method of accounting or suggest possibilities that do not align with the cash method's principles.