On January 1, 2019, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months.The amount received for the contract was $2,400.The taxpayer reported $1,200 as income on its financial statement for 2019, and should do the same for its tax return.

Question

Quizplus · Accepted Answer

Since the taxpayer is on accrual basis, they must report income when it is earned, not when it is received. The contract is for 24 months, so the taxpayer should recognize $100 of income per month for each month of the contract. Therefore, they correctly reported $1,200 of income on their financial statement for 2019 and should report the same on their tax return.

On January 1, 2019, an Accrual Basis Taxpayer Entered into a Contract