Question

Required information The following information applies to the questions displayed below. ELS Corporation is about to begin its sixth year of existence. Assume that ELS reported gross receipts for each of its first five years of existence for Scenarios A, B, and C as follows: Year of Existence Scenario A Scenario B Scenario C 20,000,000 $15,000,000 $24,500,000 25,000,000 25,000,000 25,000,000 60,000,000 35,000,000 30,000,000 80,000,000 35,000,000 40,000,000 100,000,000 40,000,000 55,000,000 4 b. In what years is ELS allowed to use the cash method of accounting under Scenario B? OYear 1, 2, and 3 Year 1, 3,4, and 5 Year 1,2, 3, and 4 Year 3, 4, and 5 Year 1, 5, and 6

Answer 1

For tax purposes, corporations with average gross receipts for the past three years of $25 million or less may use the cash method of accounting. Corporations that have not been in existence for at least three years may compute their average gross receipts over the period they have been in existence to determine if they are allowed to use the cash method of accounting.

Years
1	Yes: No gross receipts in prior year.
2	Yes, average gross receipts through year one of $15,000,000 < $25,000,000
3	Yes, average gross receipts through year two of $20,000,000 < $25,000,000
4	Yes, average gross receipts through year three of $25,000,000 = $25,000,000
5	No: average gross receipts from years two through four of 31,666,667 > $25,000,000
6	No: average gross receipts from years three through five of $36,666,667 > $25,000,000