Karen, an accrual basis taxpayer, sold goods in December 2018 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 2019. The note bore interest at the Federal rate. The fair market value of the note at the end of 2018 was $18,000. Karen collected $20,500 from the customer in April 2019, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

Question

Quizplus · Accepted Answer

Karen should recognize income of $20,000 for the sale in December 2018 as revenue is recognized when an earning process is complete, and the right to receive payment is reasonably assured. The note for $20,000 is considered a trade receivable in Karen's financial statement as of December 31, 2018, and its fair market value of $18,000 is irrelevant for tax purposes. When the customer paid the principal and interest in April 2019, Karen should recognize additional interest income of $500 in 2019, reflecting the time value of money.

Karen, an Accrual Basis Taxpayer, Sold Goods in December 2018