Karen, an accrual basis taxpayer, sold goods in December 2012 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 2013.The note bore interest at the Federal rate.The fair market value of the note at the end of 2012 was $18,000.Karen collected $20,500 from the customer in April 2013, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

Question

Quizplus · Accepted Answer

Under the accrual method of accounting, income is recognized when earned, regardless of when it is actually received. Karen sold the goods in December 2012 for $20,000, so this amount should be recognized as income for 2012. The fact that she received a note instead of cash is irrelevant.

The fair market value of the note at the end of 2012 was $18,000, so Karen recognizes $18,000 as income for 2012 as well. This is because the note is a promise to pay and has value, even if it is not cash.

When Karen collected the $20,500 in April 2013, she received $20,000 of principal and $500 of interest. The interest is also income and must be recognized in 2013. Therefore, the total income recognized is $20,000 + $500 = $20,500, which should be recognized in 2013.

Therefore, the correct choice is C: $20,000 in 2012 and $500 in 2013.

Karen, an Accrual Basis Taxpayer, Sold Goods in December 2012