Question

Apex Corp received $ 300,000 in prepaid lawn treatment services on 7/15/2019, performed 4 times a year. Performance under the contract as follows:

2019 – 2 treatments

2020 – 4 treatments

2021 – 4 treatments

2022 – 2 treatments

a. How will Apex record this income for tax purposes if Apex is using the cash method of accounting for tax purposes?

b. How will Apex record this income if Apex is using the accrual method of accounting for tax purposes and uses the deferral method?

Answer 1

a. If Apex is using the cash method of accounting for tax purposes, the entire amount of $300,000 will be recorded as income in the year 2019 when the amount is received.

b. If Apex is using the accrual method of accounting for tax purposes, and uses the deferral method, the amount of $300,000 received will be recorded as deferred revenue and income will be recognized over the period 2019 to 2022 in proportion to the services rendered each year. Thus, in 2019, income will be recognized for 2 treatments performed in 2019 out of the total 12 treatments. Income recognized in 2019 will thus only be to the extent of $300,000 x 2/12 = $50,000 and not the entire $300,000 received. Similarly, income pertaining to 4 treatments each will be recognized in 2020 and 2021 and for 2 treatments in 2022.