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 the Todd's §481 adjustment for this year?

Question

Quizplus · Accepted Answer

Todd's switch to accrual method means that he must recognize revenue when it is earned, regardless of whether it has been received or not. Therefore, for last year, Todd must recognize revenue of $420,000 even though he collected only $356,000 ($420,000 - $64,000).

Hence, Todd's §481 adjustment for this year will be the difference between the revenue he would have recognized under cash-basis accounting ($356,000) and the revenue he recognized under accrual-basis accounting ($420,000), which is $64,000. This adjustment will increase his income. Therefore, the correct answer is B) increase income by $16,000 (since 1/4 of $64,000 will be recognized as income each quarter).

Todd Operates a Business Using the Cash Basis of Accounting