On December 19, 2016, Logo Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mr. Craig, who is Logo's CFO. Logo paid the $50,000 to Mr. Craig on April 25, 2017. Which of the following statements is true?

Question

Quizplus · Accepted Answer

The expense was accrued in 2016, but the payment was made in 2017. Under the accrual basis of accounting, expenses are recognized when they are incurred, which in this case would be in 2016. However, the payment was not made until 2017, so Logo cannot deduct the expense in 2016. This is true regardless of whether Mr. Craig and Logo are related parties or not.