Question

Colbert operates a catering service on the accrual method. In July of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from August 1st of year 1 through July 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

A. $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.
B. $500 is recognized in year 1 and $8,500 in year 2.
C. $9,000 is recognized in year 3.
D. $2,500 is recognized in year 1 and $6,500 in year 2.
E. $9,000 is recognized in year 1.

Answer 1

D. $2,500 is recognized in year 1 and $6,500 in year 2.

You need another option

$2500 year 1

$6000 year 2

$500 year 3

Step-by-step explanation:

Under the accrual basis of accounting (or accrual method of accounting), revenues are reported on the income statement when they are earned. When the revenues are earned but cash is not received, the asset accounts receivable will be recorded.

Accrual method

Aug to 18 Months 9000

Aug Year 1 500

Sep Year 1 500

Oct Year 1 500

Nov Year 1 500

Dec Year 1 500 2500

Jan Year 2 500

Feb Year 2 500

Mar Year 2 500

Apr Year 2 500

May Year 2 500

Jun Year 2 500

Jul Year 2 500

Aug Year 2 500

Sep Year 2 500

Oct Year 2 500

Nov Year 2 500

Dec Year 2 500 6000

Jan Year 3 500 500