Question

Chapter 04: Gross Income: Your paper should be double-spaced and at minimum two pages long. You may use any format for the answer, however, the Conclusion, Rule, Application, Conclusion format is preferable for clarity and better understanding.

A cash basis landlord makes new tenants pay first and last month's rent at the start of the lease. How does the landlord report the following:

- Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to provide service to homeowners once a month under a one-, two-, or three-year contract. For financial reporting purposes, Purple reports the income ratably over the months of the contract. On April 1 of the current year, the company sold a customer a one-year contract for $120. How much of the $120 is taxable in the current and subsequent years if the company is an accrual basis taxpayer? If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following years? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following years?

-Pink, Inc., an accrual basis taxpayer, owns an amusement park whose fiscal year ends September 30. To increase business during the fall and winter months, Pink sold passes that would allow the holder to ride “free” during the months of October through March. During the month of September, $6,000 was collected from the sale of passes for the upcoming fall and winter. When will the $6,000 be taxable to Pink?

-The taxpayer is in the office equipment rental business and uses the accrual basis of accounting. In December he collected $5,000 in rents for the following January. When is the $5,000 taxable?

Answer 1

--Purple corporation is an accrual taxpayer, so current year remaining period income should be taxable in current year and balance in subsequent years as per below calculation:

--Pinc Inc is an accrual taxpayer so $6000 income from sale of passes will be taxable in next fiscal (Oct to Sept) since its related to next year (Oct to March). In current year's balance sheet it should be shown in current liabilities as an unearned income.

--The taxpayer is an accrual taxpayer (assuming calender year) so $5000 income from office equipment rental will be taxable in next calender year (Jan to Dec) since its related to next year (Jan). In current year's balance sheet it should be shown in current liabilities as an unearned income.