I'm confused about the approach to a couple "cash-basis to accrual basis" CPA questions.

The first question states that Class Corp maintains it's statements on a cash basis but restates it to the accrual method. In Year 2, Class had $60,000 in cash-basis income.

In Year 1, Class had $20,000 in Accounts Receivable and in Year 2, had $40,000 in accounts receivable.

In Year 1, Class had $30,000 in accounts payable and in Year 2, had $15,000 in A/P.

Under the accrual method, what should Class report as Dec. 31st, Year 2 income?

To answer this, you add the $20,000 increase in A/R since this revenue wouldn't be reflected under the cash basis and you would add back the $15,000 to the cash-basis income since this is actually a prior year expense. This gives you an accrual income of $95,000.

My question is, why is the original $60,000 cash-basis income considered the beginning balance for calculating the accrual basis income. Couldn't some of that $60,000 of cash collection be related to revenue earned during the prior year? And if that's the case, it shouldn't be considered as accrual revenue during Year 2. So why does the question assume that the $60,000 of cash basis...is also the beginning balance of trying to figure out what accrual income is for Year 2?

I decided to not worry about it...until I came to another question that did just the opposite.

Marr Corp reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended in Year 2.

Marr had Rents receivable of $1,060,000 in Year 2 and had rents receivable of $800,000 in Year 1.

Uncollectible rents written off during Year 2 were $30,000.

What should Marr's revenue be on the accrual basis?

Well, I tried solving this second problem like I did the first problem, and got it wrong.

Here, they started with the A/R of $800,000 as the balance. Added X which would be the the revenue for Year 2 that I have to solve for. Then subtracted out the 2,210,000 which were the cash collections for the year, and then subtracted out the 30,000 write offs to get to the Ending Balance receivable for Year 2 of $1,060,000.

So the question is...why do they subtract out the $2,210,000 cash collection in the second question to find revenue on the accrual basis, but not in the first question?

In the first question, not only do they not subtract out the $60,000 cash collection...but, they actually make it part of accrued revenue.

Can anyone explain to me why the handlement of the cash-basis revenue is not consistent between these two questions?

I appreciate your help.

Thank you,

~Michael 

Hi Dee,

I appreciate your link. And I understand how to apply it to the first question. Going from cash to accrual in the first question, there was an increase in A/R (CA) so you would increase accrual income. And there was a decrease in A/P (CL), so you would again increase accrual income. Hence, adding both of those to the cash basis income for year two to get $95,000.

However, if I do this same thing in question two...I'm wrong.

In question two, there was an increase in A/R, so I would increase accrual income. There was also a decrease in CA (the write-offs), so I would decrease income...according to the rules in your link.

BUT, why in the first question am I applying the rules to the beginning balance of $60,000 cash basis income. However, in the second question, if I use the $2,210,000 (cash-basis income) as my beginning balance to apply "the rules' to, I'm wrong?

Hey Nora,

Now, that actually makes a lot of sense to me. Then I'll go with the assumption that in Year 2 for the second fact pattern, that entire cash collection was a pre-paid rent receivable, which would not be considered revenue under the accrual method...hence it having to be subtracted out. And according to the "rules" in the link, pre-paid rent would be a liability on the books of the landlord...which would make accrual income decrease when going from cash to accrual.

BUT in question 1, the cash received was in fact for revenue earned in the same year. Although, that's an assumption I have to make. And I'm still not sure why it's not possible that some of that cash collection can't be for revenue actually earned in the prior year under the accrual method. Oh well, I guess I'll just move on...I've got 7 more FAR lectures!

Thanks everyone for your help!

~Michael