Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1ˢᵗ of year 1 through May 31ˢᵗ year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?
A) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.
B) $500 is recognized in year 1 and $8,500 in year 2.
C) $9,000 is recognized in year 3.
D) $2,500 is recognized in year 1 and $6,500 in year 2.
E) $9,000 is recognized in year 1.

Question

Quizplus · Accepted Answer

Prepayments for services can be deferred for one year if the payments are also unearned for financial reporting purposes. ($9,000 ÷ 18) × 1 Month = $500)

Colbert Operates a Catering Service on the Accrual Method