Question

The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies. Based on the above, Green must include in gross income for the subsequent tax year:A. $60,000.B. $50,000.C. $10,000.D. $0.E. None of these.

Answer 1

D. $0

Step-by-step explanation:

Unearned revenues are a liability (permanent account), therefore, they cannot be included in the income statement.

E.g. Journal entry to record unearned service revenue

Dr Cash 50,000

Cr Unearned revenue 50,000

Unearned revenue will continue to be a liability until the earning process is completed, then the liability is cancelled and revenue is recognized.

E.g. Journal entry to record accrued revenue

Dr Unearned revenue 50,000

Cr Service revenue 50,000