Brandon is the operator and owner of a cleaning service who uses the cash method of accounting. He receives the following payments on December 31, 2018, the last business day of his tax year:
?
$\$ 3,000$ - Checks received from customers for services rendered during November and December 2018. The checks are deposited in his bank account on January 4, 2019.
$\$ 4,000$ - Checks received from customers for services to be rendered during 2019 . The checks are received in the morning mail and deposited in his bank account on December 31, 2018.
$\$ 2,400$ - A check received from a customer for a service contract. The services under the contract are to be rendered over 24 months, beginning in January 2019. The customer met Brandon at a New Year's Eve party and gives Brandon the check at 11:30 p.m. The check is deposited in his bank account on January 4, 2019.
How much of the $9,400 collected by Brandon on December 31 must be included in his 2018 gross income?
A)$2,400
B)$3,000
C)$5,400
D)$7,000
E)$9,400

Question

Quizplus · Accepted Answer

Under the cash method of accounting, income is generally recognized in the year it is actually or constructively received. Brandon received \$4,000 on December 31, 2018, for services to be rendered in 2019 and deposited these checks the same day, so this amount is included in his 2018 gross income. Although the \$3,000 for services rendered in November and December 2018 was not deposited until January 4, 2019, it was received in 2018, making it part of the 2018 gross income. The \$2,400 received for a service contract to be rendered over 24 months beginning in January 2019 was also received in 2018, but since it's for services that are to be rendered over a period that extends beyond the end of the year, it could be argued that it should be recognized when earned. However, under the cash method, the timing of the cash receipt is what matters for income recognition, not when the services are performed. Therefore, the correct answer is the sum of the \$4,000 and \$3,000, totaling \$7,000 to be included in the 2018 gross income. The \$2,400, despite being received in 2018, is for services rendered over a period that starts in 2019, which could be allocated over the service period; however, for simplicity and based on the cash method principles, all amounts received in 2018 are typically recognized in 2018 unless specifically deferred.

Brandon Is the Operator and Owner of a Cleaning Service $3,000\$ 3,000$3,000

Brandon Is the Operator and Owner of a Cleaning Service $\$ 3,000$