Question

1. TR Corporation prepaid the rent related to their office building. $36,000 was paid on October 1, 2020. None of the prepayment was for 2020. The prepayment covered the rent for the year from January 1, 2021 through December 31, 2021. Assume TR Corporation used the cash method of accounting. You are to indicate the amount TR Corporation may deduct on its 2020 and 2021 tax return.

            2020 Deduction = ______________________________

            2021 Deduction = ______________________________

2. Assume the same facts as indicated in problem #1 except that the corporation used the accrual method of accounting. Answer the question again using the revised facts.

            2020 Deduction = ______________________________

            2021 Deduction = ______________________________

3. On November 1, 2020 RX Corporation prepaid the premium of a business insurance policy. The prepayment was $50,000. The period of time covered by the insurance policy was January 1, 2021 through December 31, 2021. Assume RX Corporation used the cash method of accounting. You are to indicate the amount RX Corporation may deduct on its 2020 and 2021 tax return.

            2020 Deduction = ______________________________

            2021 Deduction = ______________________________

4. Assume the same facts as in problem #3 above except that the corporation used the accrual method of accounting. Answer the question again using the revised facts.

            2020 Deduction = ______________________________

            2021 Deduction = ______________________________

Answer 1

Under the cash method, you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay the expenses.

Under the accrual method, you generally report income in the tax year you earn it, regardless of when payment is received. You deduct expenses in the tax year you incur them, regardless of when payment is made.

So taking above in consideration we can amount of deduction for RX Corporation for

1. Prepaid Rent Year 2020 Year 2021

Under Cash Mehod $ 36000 ------

Under accrual ------- $36000

2.Prepaid Premium Year 2020 Year 2021

Under Cash Method $ 50000 ------

Under accrual method ------- $50000