The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:
A)$60,000.
B)$50,000.
C)$10,000.
D)$0.
E)None of these.

Question

Quizplus · Accepted Answer

Unearned rent income of $10,000 must be included in gross income for the current year, as rent is generally recognized as income when received, even for accrual basis taxpayers. The $50,000 of unearned consulting revenue is not included until the services are performed.

The Green Company, an Accrual Basis Taxpayer, Provides Business-Consulting Services