Accounting -- When Is It Income? Flashcards
Describe the cash method of accounting.
A cash method TP reports income when she receives payment and takes deductions for eligible expenses when she makes payment.
What is the moment of focus in the cash method of accounting?
Moment of payment
A sees his lawyer for a 1 hour consultation in Y1. He receives a bill in December of Y1, but pays in Y2. If the lawyer uses cash method accounting, for which year will she report income?
Y2 – the year she receives payment.
A TP has “constructive receipt” when funds or property are _____ to her account, ____ ____, or otherwise made available so that she may _______ upon them.
Credited
Set apart
Draw
A calls lawyers in Dec of Y1, advising lawyer that he left a check for services rendered at his agent’s office, asking the lawyer to send a messenger to pick it up. The lawyer does not send a messenger until Y2. In which year does she report income? Explain.
Y1. Constructive receipt when funds were set apart and made available.
If a cash basis TP is entitled to income, and payment is received by the estate after a decedent’s death, the executor must report the income on whose tax return?
The estate’s.
In March of Y1, A enters into a binding contract to sell X. She delivers X according to the k, which called for payment in April.
Sadly, A dies at the end of March before receiving payment. Assume that the full payment would have been taxable income to A had she received it. The buyer made the payment to the executor in April. Should the executor reflect the payment on A’s final income tax return for the months that she was alive? Explain.
No.
A was not alive to receive payment. Instead, it should go on the estate’s return.
In March of Y1, A enters into a binding contract to sell X. She delivers X according to the k, which called for payment in April.
Buyers sends payment in April, but A is to sick to cash the check. A then dies. Should the executor reflect the payment on A’s final income tax return for the months that she was alive? Explain.
Yes.
A actually received the payment.
An accrual method TP reports income when _____ have occurred that fix the ____ to receive it, AND when when the ___ can be determined with reasonable accuracy.
Allevements
Right
Amount
An accrual method TP takes deductions when ____ _____ have occurred that establish the _____ of _____ , and when the ___ can be determined with reasonable accuracy.
All events
Fact of liability
Amount.
Lawyer is a accrual method TP. A sees lawyer in November of Y1, receives a bill in December of Y1, but does not pay until Y2. When will the lawyer report the income? Explain
Y1.
The right to receive payment is the moment she provided the legal services.
A, an accrual basis TP, contracted in March of Y1 with a consultant for a quality review of its operations. The report was delivered in December of Y1 and payment was made in Feb of Y2. For which year is A entitled to a deduction? Explain.
Y1. This is when all events occurred that established the fact of liability.
