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Accrual Purposes A. Say you are an accrual basis calendar year taxpayer and you receive $3,000...

Accrual Purposes

A. Say you are an accrual basis calendar year taxpayer and you receive $3,000 in November Year1 to render services. You finish the services on 12/31 Year 1 but don’t send the bill until January Year 2. When do you report the income?

B. What if you finished 1/3rd of the services by Year 1 and finished the rest by Year 2?

C. What if in the previous question you reported $3,000 in Year 1 on your income statement?

D. What if you don’t report any income on the financial statements, earn 1/3rd of the income inYear 1, 1/3rd in Year 2, and $1,000 in Year 3?

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Answer #1

A. Income of $3000 will be reported in Year 1, since services are provided in Year 1

B. Income of $1000 i.e. $3000 x 1/3 will be reported in Year 1, and $2000 will be reported in Year 2

C. Income is overstated by $2000, since only $1000 was earned in Year 1

D. Income is understated by $1000 in Year 1

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