Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2018. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2019. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:
A) $0 in 2018, if Office Palace is an accrual basis taxpayer.
B) $7,800 in 2019, if Office Palace is a cash basis taxpayer.
C) $2,700 in 2018, if Office Palace is a cash or accrual basis taxpayer.
D) $1,200 in 2018, if Office Palace is a cash or accrual basis taxpayer.
E) None of these.

Question

Quizplus · Accepted Answer

Office Palace must recognize $1,200 in 2018 as income for the lease. This is because Office Palace is an accrual basis taxpayer, and under the accrual method of accounting, revenue is recognized when it is earned, regardless of when cash is received. In this case, Office Palace earned the $1,200 in rent for the first and last month of the lease in 2018, even though the cash was not received until 2019.