Question

In October of year 0, Janine received a $17,680 payment from a client for 34 months of security services she will provide starting on November 1 of year 0. This amounts to $520 per month. Janine is a calendar-year taxpayer.

a. When must Janine recognize the income from the $17,680 advance payment for services if she uses the cash method of accounting?
b. When must Janine recognize the income from the $17,680 advance payment for services if she uses the accrual method of accounting?

Answer 1

Answer and Explanation:

a) Under this case Janine must recognize the entire $17360 as income of year 0 because cash are received in this year.

b) Under this case Janine must recognize the amount of ($620*2=$1240) in year 0 and remaining amount ($17360-$1240=$16120) will be shown as income received in advance in year 1 .