Todd operates a business using the cash basis of accounting.At the end of last year,Todd was granted permission to switch his sales on account to the accrual method.Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year.What is Todd's §481 adjustment for this year?
A) increase income by $420,000.
B) increase income by $16,000.
C) increase expenses by $64,000.
D) increase expenses by $420,000.
E) Todd has no §481 adjustment this year.

Question

Quizplus · Accepted Answer

The §481 adjustment is the difference between the income recognized under the cash method and the accrual method. Since $64,000 was uncollected, Todd would have recognized $420,000 - $64,000 = $356,000 under the cash method. Therefore, the adjustment is $420,000 - $356,000 = $64,000, but since $64,000 was uncollected, the net effect is to increase income by $16,000.

Todd Operates a Business Using the Cash Basis of Accounting