Question

Malo Inc. uses a fiscal year ending June 30. On May 29, Malo received a check for $3,900 from a business that leases parking spaces in Malo’s parking garage. This payment was for the three-month period beginning June 1. On June 15, Malo sent an invoice for $5,500 to a customer for services rendered during May and June. Malo received payment from the customer on July 3.

A) If Malo is a cash basis taxpayer, how much income should it recognize from the given transactions in the current fiscal year?

B) If Malo is an accrual basis taxpayer, how much income should it recognize from the given transactions in the current fiscal year?

Answer 1

A)

Date	Description	Amount
May 29	Cheque received ( lease business )	$3900
	Total income	$3900

A cash basis taxpayer is a taxpayer who reports income and expenditure in the year in which they are received or paid actually.They are not entitled to claim payables as expenditure and cannot report receivables as income. Therefore

Income recognized = $3900

B)

Date	Description	Amount
May 29	Cheque received ( lease business )	$1300
June 15	Services rendered	$5500
	Total income	$6800

An accrual basis taxpayer is a taxpayer who report income when it is earned and expenses when it is incurred. this method doesn't take into consideration whether payment is made or payment is received.

Since the cheque was received for 3 months and only one month belong to the current fiscal year , one third of the receipt sholud be accounted this year. Balance receipt will be recognized in the next year.Therefore

Amount of income = 3900 ÷ 3 = 1300

In the case of service rendered, amount was recived in the next fiscal year but the services was made in the month of May and June which belongs to the current fiscal year, the whole amount should be recognised as income . Therefore

Amount of income = 5500

Total amount of income = 1300+5500

= $ 6800