Question

Copier Choice Corporation (CCC) is a calendar year, accrual method, C corporation engaged in the business of selling, leasing, and servicing copiers primarily to service businesses such as accounting and law firms. During the fourth quarter of 2017, CCC received the following two payments:

-Service payment: CCC received a $375,000 fee for a 15-month service contract on 375 copiers sold be CCC in Oct of 2017 to a national law firm. Under the terms of the contract, CCC will provide all routine maintenance and service work on the copiers sold to the national law firm from Nov 1, 2017 through Jan 31, 2019.

-Rent payment: CCC received a $150,000 of advance rental payment from a national accounting firm in Dec 2017 on copiers it rents to the national accounting firm. The advance rent payment is for the first quarter of 2018. Under the terms of the contract, CCC requires the national accounting firm to prepay one quarter (3 months) of rent.

1) What amount of service income should CCC report in 2017, 2018, and 2019 on its financial income statements form the fourth quarter payment? Please show your work and explain your calculations.

2) What amount of service income should CCC report in 2017, 2018, and 2019 on its federal tax return from the fourth quarter payment? Please show your work and explain your calculations.

3) What amount of rent should CCC report in 2017 and 2018 on its financial income statements from the fourth quarter payment? Please show your work and explain your calculations.

4) What amount of rent income should CCC report in 2017 and 2018 on its federal tax return from the fourth quarter payment? Please show your work and explain your calculations.

Answer 1

Answer 1:

CCC received a $375,000 fee for a 15-month service contract on 375 copiers sold by CCC in Oct of 2017. Under the terms of the contract, CCC will provide all routine maintenance and service work on the copiers sold to the national law firm from Nov 1, 2017 through Jan 31, 2019.

As the service fees if for the services performed from Nov 2017 through Jan 2019, it is to be recognized proportionately in that period.

Service income should CCC report in 2017 financial income statements would be proportionate service fees for Nov and Dec 2017 (2 months) = ($375,000 / 15) * 2 = $50,000

Service income should CCC report in 2018 financial income statements would be proportonate service fees for the period from Jan 2018 to Dec 2018 (12 months) =  ($375,000 / 15) * 12 = $300,000

Service income should CCC report in 2019 financial income statements would be proportinate service fees for the month Jan 2019 =  ($375,000 / 15) * 1 = $25,000

Answer 2:

For Federal tax purposes the advance service fee received is taxable in the period received.

As such,

Service income CCC should report in 2017 tax return = $375,000

Service income CCC should report in 2018 tax return = $0

Service income CCC should report in 2019 tax return = $0

Answer 3:

CCC received a $150,000 of advance rental payment from a national accounting firm in Dec 2017 on copiers it rents to the national accounting firm. The advance rent payment is for the first quarter of 2018. Under the terms of the contract, CCC requires the national accounting firm to prepay one quarter (3 months) of rent.

As the advance rental receipt of $150,000 in 2017 is towards rental for first quarter of 2018, the revenue need to be recognised in first quarter of 2018.

Hence,

Rental income to be recognized in CCC report in 2017 financial income statements = $0

(The advance rental received, is to be accounted for as unearned revenue in 2017)

Rental income to be recognized in CCC report in 2018 financial income statements = $150,000

Answer 4:

For Federal tax purposes the advance rental receipt is taxable in the period received.

As such,

Rent income CCC should report in 2017 on its federal tax return = $150,000

Rent income CCC should report in 2018 on its federal tax return = $0