Question

For each of the following situations, determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer:

a. Helen fixes Mark's plumbing in November 2019. Mark receives the bill in December 2019 but does not pay Helen until January 2020.

b. Siddaround, Inc. sells a mattress to Lorissa for $6,000. The terms of the sale call for Lorissa to pay $3,000 in the year of sale and $1,000 in each of the succeeding 3 years.

c. Maury's Computer Consultants, Inc. performs work for Janis in 2019. Maury's bills Janis in 2019, but no payment is received. In 2020, Janis files for bankruptcy, and Maury's determines that it will be able to collect nothing on her account.

Answer 1

Answer (a) :

Helen will recognize the revenue when she paid in January 2020,only if she uses the cash basis accounting method.

Whereas Helen will recognize the revenue when it is earned in 2019, only if she uses the accrual basis accounting method.

If Mark use the cash basis of accounting in 2019 for the payment, he can deduct the plumbing expenses in 2020.

When Mark incurred in expenses if he is an accrual basis taxpayer.

Answer (b) :

If Siddaround uses the cash basis of accounting, Siddaround will recognize the revenue of $3,000 in the current year and will recognize $1,000 in each of the following 3 years. Where as if Siddaround uses the accrual basis accounting,Siddaround will recognize $6,000 in the current year because headstone is a personal expenditure. Hence Lorissa will not allowed a deduction for the cost.

Answer (c) :

No income would recognized because no payment is received if Maury uses the cash basis accounting. if no income recognized then the cash basis taxpayer will not allowed to get deduction for the bad debts.

Maury can recognize the revenue for the service provided 2019 if Maury uses the accrual basis accounting.

Maury determines the uncollectible account in 2020 then maury allowed to get the deduction for the bad debts to balance the revenue recognized in 2019,