On January 1, 2012, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400. The taxpayer should report $1,600 of income in 2013.

Question

Quizplus · Accepted Answer

The income from the contract should be recognized over the 36-month period of service. Therefore, $2,400/36 = $66.67 per month. In 2012, the taxpayer would recognize $66.67 x 12 = $800 of income. In 2013, the taxpayer would recognize $66.67 x 12 = $800 of income, plus the portion of the contract not yet recognized, which is $800 - $200 = $600. Therefore, the total income recognized in 2013 would be $800 + $600 = $1,600.

On January 1, 2012, an Accrual Basis Taxpayer Entered into a Contract