The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies. Based on the above, Green must include in gross income for the subsequent tax year:

Question

Quizplus · Accepted Answer

The company is using the accrual basis of accounting, which means that income is recognized when earned, regardless of whether it has been received yet. Therefore, the $50,000 of unearned revenues constitute income that has been earned but not yet received. The $10,000 of unearned rent income, on the other hand, is not related to the company's main business of providing consulting services and is therefore not included in the calculation of gross income for the subsequent tax year. Therefore, the correct answer is B) $50,000.

The Green Company, an Accrual Basis Taxpayer, Provides Business-Consulting Services