Question

For the following scenarios, indicate how much of the following items of income and expense would be recognized in the current year if the taxpayer elects to file as a (1) cash basis taxpayer or (2) accrual basis taxpayer:

	Cash basis	Accrual basis
On Dec 15 ABC paid $2,000 for utilities from 1/1 through 10/31 of the following year.
At year-end, ABC estimates it will be unable to collect about $5,000 from customers for services completed this year. In addition, ABC is writing off receivables of $3,000 from Mr. Jones.
On 5/30, ABC paid $5,400 for the next 8 months of interest on a business loan.
On 8/1 ABC received $12,000 from a tenant who rents some excess warehouse space in a building owned by ABC. The $12,000 pays for 6 months’ rent beginning 8/1 of the current year.
ABC sent a check to its insurance company for $9,000 on 7/31 of the current year. This $9,000 will cover the cost of ABC’s insurance for 24 months beginning 8/1 of the current year.
ABC sent a check to its insurance company for $9,000 on 7/31 of the current year. This $9,000 will cover the cost of ABC’s insurance for 12 months beginning 8/1 of the current year.
On 11/1, ABC received a $5,000 down payment from a new customer for services to be provided by the company in March of the following year.
ABC made $525 in campaign contributions this year to support Homer Simpson’s gubernatorial campaign.

Answer 1

Sl. No.	Questions	Cash Basis	Accrual Basis	Narration
1.	On Dec 15 ABC paid $2,000 for utilities from 1/1 through 10/31 of the following year.	$2000	$0
2.	At year-end, ABC estimates it will be unable to collect about $5,000 from customers for services completed this year. In addition, ABC is writing off receivables of $3,000 from Mr. Jones.	$0 (Cash basis do not consider future receipts or Loses, hence not recognised)	$ 5000 -3000 $2000	-$3000 considerd as bad debt $2000 as net income
3.	On 5/30, ABC paid $5,400 for the next 8 months of interest on a business loan	$5400 to be recognised on cash basis accounting	(5400/8)*7 = $4,725.	Since the accountig is for Calander year ending on Dec constituting 7 months in the current calander year and 1 month insubsequent year. Therefore the amount to be considered in current year. To be considered in subsequent year $675.
4.	On 8/1 ABC received $12,000 from a tenant who rents some excess warehouse space in a building owned by ABC. The $12,000 pays for 6 months’ rent beginning 8/1 of the current year.	$12,000	August - $0 December 31st $10,000	Rent for 6 months- $12,000, Number of months in current year = 5 rental income for current year = ($12,000/6)*5=$10,000
5.	ABC sent a check to its insurance company for $9,000 on 7/31 of the current year. This $9,000 will cover the cost of ABC’s insurance for 24 months beginning 8/1 of the current year.	$9,000	$1,875	Insurance for 24 months- $9,000, Number of months in current year = 5 Insurance Expense for current year = ($9,000/24)*5=$1,875
6.	ABC sent a check to its insurance company for $9,000 on 7/31 of the current year. This $9,000 will cover the cost of ABC’s insurance for 12 months beginning 8/1 of the current year.	$9,000	$3,750	nsurance for 12 months- $9,000, Number of months in current year = 5 Insurance Expense for current year = ($9,000/12)*5=$3,750
7.	On 11/1, ABC received a $5,000 down payment from a new customer for services to be provided by the company in March of the following year.	$5,000	$0	Income accrues and arises when the services are rendered. in this scenaio the services are to be rendered in March of the following year. Hence this will be recognised as income in the following year.
8.	ABC made $525 in campaign contributions this year to support Homer Simpson’s gubernatorial campaign.	$525	$525	Simpson’s gubernatorial campaign conducted in the current year hence the expenses are considered in current year.