Question

Steven operates a landscaping service on the accrual method. In September of this year Steven received a payment of $18,000 for 24 months of landscape services ($750 per month commencing on November 1st of this year). When must Steven recognize the income if his accounting methods are selected to minimize income recognition? A. $1,500 is recognized in this year, $16,500 next year.B. $1,500 is recognized this year, $9,000 next year, and $7,500 in the last year or the contractC. $18,000 is recognized this yearD. $9,000 is recognized this year and $9,000 next yearE. $18,000 is recognized in the last year of the contract

Answer 1

B: $1,500 is recognized this year, $ 9,000 next year and $ 7,500 in last year of contract.

Step-by-step explanation:

Steven has adopted the accrual method in recording its revenue.

Accrual is an accounting concept which means expenses and revenues are recorded by a business when they are incurred not when cash is received or paid.

Accrual basis of accounting gives more accurate and true results as compare to cash basis accounting.

The payment received in September of $ 18,000 was the income for 24 months so it was wrong to record the whole amount as an income in September.

In the first year 2 months of income is recorded for November and December ($ 18,000÷24 = $750 per month) $750 × 2 = $1500.

In the second year 12 months revenue will be recognized ($750 per month × 12 = $ 9,000)

In the last year 10 month remained out of 24 months so the income recognized was ( $750 × 10 = $ 7,500)