Karen,an accrual basis taxpayer,sold goods in December 2016 for $20,000.The customer was unable to pay cash.So the customer gave Karen a note for $20,000 that was payable in April 2017.The note bore interest at the Federal rate.The fair market value of the note at the end of 2016 was $18,000.Karen collected $20,500 from the customer in April 2017,$20,000 principal plus $500 interest.Under the accrual method,Karen must recognize income of:

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Under the accrual method, income is recognized when it is earned, regardless of when payment is received. In this case, Karen earned $20,000 in income in December 2016 when she sold the goods. The fact that she did not receive payment until April 2017 is irrelevant. The fair market value of the note at the end of 2016 is evidence that the note was worth $18,000 at that time, which is less than the amount of income earned. Therefore, Karen must recognize the full $20,000 of income in 2016. When she received payment in April 2017, she received both principal and interest. The $500 of interest is additional income that must be recognized in 2017. Therefore, Karen must recognize $20,000 of income in 2016 and $500 of income in 2017.

Karen,an Accrual Basis Taxpayer,sold Goods in December 2016 for $20,000