Question

Exercise 16-28 (lo. 2) in 2023, chaya corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. the clients signed notes receivable to chaya that have a fair market value of $22,000 at year-end. in addition, chaya sold a 36-month service contract on june 1, 2023, and received payment in full of $12,000. round any division to four decimal places. if required, round your final answers to the nearest dollar. how much gross income does chaya report from these transactions in 2023?

from the services to clients:

Answer 1

Chaya Corporation should report $25,000 as gross income from services provided to clients and $2,333.33 from the prorated portion of the service contract in 2023, totaling $27,333.33 in gross income for the year.

Step-by-step explanation:

To determine how much gross income Chaya Corporation should report for the tax year 2023, we need to consider the revenue recognition principles under the accrual accounting method. For the services provided resulting in a note receivable, the income is recognized at the earned amount rather than the fair market value of the note. Therefore, Chaya Corporation will report $25,000 as gross income from the services provided to clients.

Regarding the 36-month service contract, since the service is to be provided over multiple years and the payment was received upfront, the income must be prorated over the duration of the contract. Therefore, as the contract started on June 1, 2023, and the tax year ends on December 31, 2023, there are 7 months in 2023 during which the service contract is active. The income for 2023 from the service contract would therefore be 7/36 of the total $12,000, which calculates to $2,333.33 (rounded to the nearest dollar).

The overall gross income Chaya Corporation would report in 2023 from these transactions would be the sum of $25,000 from services and $2,333.33 from the service contract, totaling $27,333.33.