Question

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 19% of this year Mike received $18,600 for four outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next four summers, beginning this year. How much Income must Mike recognize in each of the next four years if he is attempting to minimize his tax burden? Essay Toolbat navigation BI V S E 111! AA

Answer 1

As Mike is following accrual basis of accounting, he should revenue (income) when the obligation is actually made. In clear words when Mike has completed the trip (which is the obligation in present situation).

As Mike has received 18,600 for all the four trips, he should treat that as an advance payment received under unrecognised revenue account. As and when the outfitting trip is completed Mike should recognise the revenue.

Therefore he should recognise 4,650 (18,600 ÷ 4) for each of the next four years. Also this reduces his tax burden.