Question

With respect to the unearned income from services, which of the following is true? a.An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed within three years following the year of receipt. b.The treatment of unearned income is the same for tax and financial accounting for both cash and accrual basis taxpayers. c.A cash basis taxpayer must report all of the income in the year received. d.An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less. e.None of these choices are correct.

Answer 1

For unearned income from services, a cash basis taxpayer must include the full amount of income in the year it is received. This differs from accrual basis accounting, where income is recognized when it is earned. Tax treatment rules also vary from financial accounting standards.

Step-by-step explanation:

With respect to the unearned income from services, the correct statement is c. A cash basis taxpayer must report all of the income in the year received. This is because, under the cash basis method of accounting, income is only recognized when cash is received, not when the services are performed. Therefore, if a cash basis taxpayer receives payment for services that will be provided in the future, they are still required to record this income in the year it is received. This approach is different from an accrual basis, where income is recognized when earned, regardless of when payment is received.

It's important to note that for tax purposes, the treatment of unearned income can differ from the treatment for financial accounting purposes. There are specific rules and elections that may allow accrual basis taxpayers to defer income under certain circumstances, but the general principle for cash basis taxpayers remains the same; they must report the income when it is received, not when it is earned.

Answer 2

c. A cash basis taxpayer must report all of the income in the year received.

Step-by-step explanation:

As a standard, all individuals and business entities are required by law to pay their taxes to the government at a specific period of time.

With respect to the unearned income from services, a cash basis taxpayer must report all of the income in the year received, whether as property or in cash. This simply means that, a cash basis taxpayer can neither deduct promissory notes or checks as payments nor report receivables as income because all of the expenses and income must be reported in the year they were received or paid.

However, not all taxpayers are permitted to use the cash basis method of reporting, these include C corporations, tax shelter, partnership with a C corporation etc.