Question

On January 1, 2015, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months. The amount received for the contract was $2,400. The taxpayer should report $1,600 of income in 2016.

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Answer 1

The taxpayer should report $1,200 of income in 2016.

Step-by-step explanation:

The correct answer is that the taxpayer should report $1,200 of income in 2016.

When reporting income using the accrual basis, the income is recognized in the year in which the services are provided. In this case, the taxpayer entered into a contract to provide termite inspection services each month for 36 months, starting on January 1, 2015. Therefore, the income from the contract should be allocated over the term of the contract, and $1,200 should be reported in the year 2016.

By recognizing the income over the term of the contract, the accrual basis taxpayer accurately reflects the timing of the revenue earned.