Question

Maroon Corporation expects its 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 2019?

a) The employee would be required to recognize the income in December 2019 because it is constructively received at the end of the month.

b) The employee would be required to recognize the income in December 2019 because the employee has a claim of right to the income when it is earned.

c) The employee will not be required to recognize the income until it is received, in 2020.

d) The employee can elect to either include the pay in 2019 or 2020.

e) None of these.

Answer 1

The proposed change in company policy would require employees to recognize the income in December 2019.

Step-by-step explanation:

The effect on an employee of the proposed change in company policy for paying its salaries beginning December 2019 would be that:

a) The employee would be required to recognize the income in December 2019 because it is constructively received at the end of the month.

Under the cash method, income is recognized when it is constructively received, meaning when it is made available to the employee even if it is not physically received. Since the employee has a claim of right to the income when it is earned in December 2019, they would be required to recognize it in that year.