The taxpayer had incorrectly been using the cash method of accounting. For 2018, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2018 was $120,000 (positive). The adjustment as calculated as of the end of 2018 was $80,000 (positive). As a result of the change in method, the company must:
A) Increase its income for 2018 by $120,000.
B) Increase its income for 2018 by $80,000.
C) Increase its income for 2018 by $30,000.
D) Increase its income for 2018 by $40,000.
E) None of the above.

Question

Quizplus · Accepted Answer

The adjustment is spread over four years. The difference between the beginning and end of 2018 adjustments is $40,000 ($120,000 - $80,000), but only one-fourth of the beginning adjustment is recognized in 2018, which is $30,000 ($120,000 / 4).

The Taxpayer Had Incorrectly Been Using the Cash Method of Accounting