Question

Karen, an accrual basis taxpayer, sold goods in December 2019 for $20,000. The customer was unable to pay cash. So the customer gave Karen a note for $20,000 that was payable in April 2020. The note bore interest at the Federal rate. The fair market value of the note at the end of 2019 was $18,000. Karen collected $20,500 from the customer in April 2020, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

Answer 1

Karen must recognize income of $20,000 in 2019 and $500 in 2020

Step-by-step explanation:

Accrual basis of accounting states that income must be recognized in the period when it is earned and expenses must also be recognized when it is incurred.

Therefore, since the goods was sold in December 2019 and $500 interest was paid with the principal in April 2020, Karen must recognize income of $20,000 in 2019 and $500 in 2020.