Question

Teal company is an accrual basis taxpayer. On December 1, 2019, a customer paid Teal for an inventory item that was on hand, but the customer wanted the item delivered in early January of 2020. Teal delivered the item on January 4, 2020. Teal included the sale in its 2020 income for financial accounting purposes. For tax purposes:

a. Teal must recognize the income in 2019.

b. Teal must recognize the income in the year title to the goods passed to the customer, as determined under the laws of the state in which the store is located.

c. Teal can elect to recognize the income from this prepayment in either 2019 or 2020.

d. Teal must recognize the income in 2020.

e. Teal must recognize the income in the same year as it does for financial accounting purposes.

Answer 1

Solution: The answer is

a. Teal must recognize the income in 2019.

Explanation:

1) Customer paid to company in 2019, December 1st but wants the product in January. So, mere delivery of product in the next year does not qualify the transaction has it change in next year.

2) Teal company follows accrual accounting system.

3) So, the transaction happened in 2019 itself.

4) Remaining options are specifying that transaction will be recorded in 2020. So, There are incorrect.