Question

1. Alexandria and Charles Co are both accrual-method taxpayers. Alexandria owns all the stock of Charles Co. Alexandria supplied services to Charles Co and accrued income there from (represented by bookkeeping entries of accounts receivable and payable) of $10,000; Charles Co deducted $10,000. Later, Alexandria forgave the account owing in return for stock of Charles Co worth $6,000. How much income or loss must Alexandria and Charles Co recognize? What would result if Charles Co was on the cash method of accounting and had not deducted the $10,000?

Answer 1

In this case as they are following accrual system of accounting Alexander should recognise $10000 as Income . Hence the charles Co should book $ 10000 as payable to Alexandria. Later $ 6000 should be adjusted by Alexandria against the stock held by them on behalf of Charles Co and net eggect will be 4000$ will be owed from charles co.

If they follow cash method of accounting , then 6000 will be adjusted for the stock and the rest 4000 will be due to Alexandria.