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 Topic: Does this answer make sense? ( Topic Closed)
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tho9504
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| Posted: 16 Nov 2011 at 21:49 | IP Logged
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Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its 19X2 and 19X1 balance sheets, respectively. During 19X2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace's 19X2 corporate income tax return, what amount should Ace include as rent revenue?
a. $50,000
b. $55,000
c. $60,000
d. $65,000
CPA-02147 Explanation
Choice "d" is correct. Rent revenue under the accrual basis would include the cash received ($50,000) plus the increase in the rent receivable ($10,000 = $35,000 − 25,000), or $60,000. In addition, the $5,000 nonrefundable rent deposit is additional rent revenue, for a total of $65,000.
I would've thought the answer would be the cash collected if $55,000. The 10K increase in rent receivable is accrual revenue not yer received. For taxable income, are we not suppose to only count cash received?
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divyagovil1
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| Posted: 16 Nov 2011 at 22:25 | IP Logged
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Key words are "accrual-basis tax payer"
The increase in receivable is income and it is taxed.
Plus the fact the taxpayer is accrual basis trigger a
recognition of income. If the taxpayer was cash basis it
would not be income.
Under an accrual method, you generally report income in
the tax year you earn it, regardless of when payment is
received, and deduct expenses in the tax year you incur
them, regardless of when payment is made.
Refer following link:
http://www.irs.gov/businesses/small/article/0,,id=98680,0
0.html
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Ethics - 2011
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CPA#1
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| Posted: 17 Nov 2011 at 12:21 | IP Logged
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This is a tricky one and got stumped myself.
Regardless of what method we use, if we're receiving cash (even if it's advance payment), we must report it as Taxable Income.
This question included that Rent Receivable balance in the mix. So, I assume we're adding BOTH cash received and income earned as well since we're on the accrual method.
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DONE!!!!!!!
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