Which of the following payments received on December 31, 2018, would be recognized by a cash basis taxpayer in 2018, but would not be recognized in 2018 by an accrual basis taxpayer?
I.Checks received from customers for services rendered during November and December 2018. The checks are deposited in the bank account on January 4, 2019.
II.Checks received from customers for services to be rendered during 2019. The checks are received in the morning mail and deposited in the bank account on December 31, 2018.
III.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 check is deposited in the bank account on January 4, 2018.

A)Only statement I is correct.
B)Only statements I and II are correct
C)Only statement III is correct.
D)Only statements II and III are correct.
E)Only statement II is correct.

Question

Which of the following payments received on December 31, 2018, would be recognized by a cash basis taxpayer in 2018, but would not be recognized in 2018 by an accrual basis taxpayer?
I.Checks received from customers for services rendered during November and December 2018. The checks are deposited in the bank account on January 4, 2019.
II.Checks received from customers for services to be rendered during 2019. The checks are received in the morning mail and deposited in the bank account on December 31, 2018.
III.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 check is deposited in the bank account on January 4, 2018.
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A)Only statement I is correct.
B)Only statements I and II are correct
C)Only statement III is correct.
D)Only statements II and III are correct.
E)Only statement II is correct.

Quizplus · Accepted Answer

In accrual accounting, revenue is recognized when it is earned and not necessarily when the payment is received. Therefore, statement I would not be recognized in 2018 by an accrual basis taxpayer because the revenue was earned in November and December 2018 but the payment was received in January 2019. However, for a cash basis taxpayer, the revenue would be recognized in 2018 when the payment was received.

Statement II would be recognized in 2018 by both cash and accrual basis taxpayers because the payment was received in 2018. However, for an accrual basis taxpayer, the revenue would not be recognized until the services are actually rendered in 2019.

Statement III would not be recognized in 2018 by an accrual basis taxpayer because the services will not be rendered until 2019. However, for a cash basis taxpayer, the revenue would be recognized in 2018 when the payment was received.

Which of the Following Payments Received on December 31, 2018