Question

WFO Corporation has gross receipts according to the following schedule:

Year 1 $22 million
Year 2 $24 million
Year 3 $26 million
Year 4 $24.5 million
Year 5 $25 million
Year 6 $27 million

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

a. Year 4.
b. Year 6.
c. Year 3.
d. Year 5.
e. None of the choices are correct.

Answer 1

WFO Corporation would have first been required to use the accrual method in Year 4.

Step-by-step explanation:

The accrual method is a method of accounting that recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid. The cash method is a method of accounting that recognizes revenue and expenses when the cash is received or paid.

In the case of WFO Corporation, they would have first been required to use the accrual method in Year 4, when their gross receipts were $24.5 million. This is because the threshold for switching from the cash method to the accrual method is $25 million gross receipts for a three-year period.