CT Computer Corporation,an accrual basis taxpayer,sells service contracts on the computers it sells.At the beginning of January of this year,CT Corporation sold contracts with service to begin immediately: The amount of income CT Corporation must report for this year is
A)$200.
B)$1,000.
C)$1,680.
D)$5,000.

Question

CT Computer Corporation,an accrual basis taxpayer,sells service contracts on the computers it sells.At the beginning of January of this year,CT Corporation sold contracts with service to begin immediately:  The amount of income CT Corporation must report for this year is
A)$200. 
B)$1,000. 
C)$1,680. 
D)$5,000.

Quizplus · Accepted Answer

CT Corporation sold service contracts with the computers it sold. The amount paid for the service is considered unearned income until the services are provided. Therefore, the income must be recognized proportionately as income over the life of the contract. Since the contracts were sold at the beginning of the year, the income recognized this year would be the proportion of the service provided from the beginning of the year until the end of the year.

The service contracts sold at the beginning of the year were for immediate service, so the entire amount received for these contracts is considered unearned income. The total amount received for the contracts was $5,040 ($420 x 12).

To calculate the income recognized this year, we need to determine the proportion of services provided from the beginning of the year until the end of the year. Assuming the service contracts provide service for the entire year, the proportion of services provided this year would be 1/12.

Therefore, the income recognized this year would be:
$5,040 x 1/12 = $420

So, the answer is C) $1,680.

CT Computer Corporation,an Accrual Basis Taxpayer,sells Service Contracts on the Computers