Warm-a-Home, an accrual basis calendar year taxpayer, sells furnaces.With each sale, the corporation also sells a one-, two-, or three-year contract to turn the furnaces on and off and do routine maintenance.Assuming the corporation sold a one-year contract on November 1 at a price of $120, it will report income for this year of $20.

Question

Quizplus · Accepted Answer

Since Warm-a-Home is an accrual basis taxpayer, it will report income when it has earned it, not when it receives payment. The $120 received for the one-year contract on November 1 will be recognized as income over the course of the year, so for this year (assuming a calendar year), it will recognize 2/12 of the income, or $20.

Warm-A-Home, an Accrual Basis Calendar Year Taxpayer, Sells Furnaces