Question

1. What is the amount of income to be reported by Mr. X in Year 2 under the cash method of accounting for the following items?

Check for $1,200 received January 4, Year 2, for services rendered in December Year 1.

Check for $900 received December 26, Year 2, for services rendered in October, Year 2; did not cash until January 5, Year 3.

Dividend check for $500. Check was dated December 31, Year 2, but it is the practice of the issuing corporation to mail checks so they will not be received until January of the following year.

Check for $600 received on April 1, Year 2, for interest on corporate bonds held for the period October 1, Year 1, through March 31, Year 2. Interest is paid semi-annually on April 1 and October 1.

Rental income of $800 for December Year 2 received January 3, Year 3.

2. Basil Company, a cash-basis taxpayer, had the following activity during Year 1:

Sales in Year 2, uncollected	$     40,000
Sales in Year 2, collected	1,000,000
Total sales in Year 2	1,040,000
Collections on Year 1 bad debt	50,000

What is the correct amount of income to be reported for Year 2?

Answer 1

1. Computation of amount of Income to be Reported ( on Cash Basis)
Particular	Amount
Check received on January 4, Year 2, for services rendered in December Year 1	1200
Check received December 26, Year 2, for services rendered in October, Year 2	900
Dividend Check for $500 but not received till date( Considered when received)
Check received on April 1, Year 2, for interest on corporate bonds	600
Rental Income of $800 recevived next year ( Considered in Next year Income)
Amount of Income to be reported	2700

2. Corrected Income to be reported in Year-2 will be $1000000 ( Sales in Year 2, Collected)