Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
-Bigtown Advertising Agency, a calendar-year, accrual basis taxpayer, was paid $60,000 for a three-year advertising contract on July 1, 2017, and $36,000 for a 12-month contract on December 1, 2017 How much income must Bigtown recognize for these contracts in years 2017 and 2018, respectively?

Question

Quizplus · Accepted Answer

For tax purposes, income is generally recognized when it is earned, not when it is received. The $60,000 received on July 1, 2017, is for a three-year contract and would be recognized as $20,000 of income for each year of the contract (2017, 2018, and 2019). The $36,000 received on December 1, 2017, is for a 12-month contract and would be recognized as $36,000 of income in 2018. Therefore, Bigtown would recognize $20,000 + $20,000 + $36,000 = $76,000 of taxable income in 2017 and $36,000 of taxable income in 2018.

Put T for Taxable Income or N for Nontaxable Income