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Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to provide service to...

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. 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 year 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 year? 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 year?

Solutions

Expert Solution

For accrual basis taxpayer to amortize Deferred income for one year contract.

In this case, Contract sold for one year on April 1, current year. So April to December = 9 months.

9 month income recognized in current year (120*9/12)

              90

Remaining income for 3 Month recognized in Following year (120*3/12)

              30

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 year?

9 month income recognized in current year (120*9/24)

45

Remaining income for (2 year =24months) (24-9=15) 15 Month recognized in Following year (120*15/24)

75

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 year?

9 month income recognized in current year (120*9/36)

30

Remaining income for (3 year =36months) (36-9=27) 27 Month recognized in Following year (120*27/36)

90

ekkarill92 answered 3 years ago
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