Lynn O'Leeum is an accrual basis calendar year taxpayer.He operates a flooring company.His accounting records for 2012 reveal the following: Collections on accounts receivable $\quad$$\$ 405,000$
Sales on account to customers $\quad$521,000
Rent received on November 1, 2012
for use of part of his warehouse
from November 1, 2012 to April 30, $2012 \quad\quad 12,000$
Rent received on February 1, 2012 for use of part of his
warehouse for December 2010 and January $2012 \quad\quad 4,000$ Of the amounts collected on the accounts receivable, $25,000 was for receivables outstanding at the end of 2009.Lynn will include gross income for 2010 of

Question

Quizplus · Accepted Answer

For an accrual basis taxpayer like Lynn, income is recognized when earned, not when received. The sales on account ($521,000) are included in gross income for 2012 because that's when the sales occurred. The rent received in advance ($12,000) for November 1, 2012, to April 30, 2013, is also included in 2012 income because it was earned in that period. The rent received for December 2010 and January 2012 ($4,000) is not included in 2012 income because it was earned in prior periods. The collections on accounts receivable include amounts for sales made in prior years, but for an accrual basis taxpayer, what matters is when the income was earned, not when it was collected. Therefore, the correct gross income for 2012 is sales on account plus the advance rent received, which totals $521,000 + $12,000 + $4,000 = $537,000. However, the $4,000 for rent received for December 2010 and January 2012 should not be included in 2012 income as it was earned in prior periods, making the correct answer $521,000 + $12,000 = $533,000.

Lynn O'Leeum Is an Accrual Basis Calendar Year Taxpayer \quad $405,000\$ 405,000$405,000

Lynn O'Leeum Is an Accrual Basis Calendar Year Taxpayer $\quad$ $\$ 405,000$