Question

On January 1, 2015, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months. The amount received for the contract was 2,400. How much income should the taxpayer report in 2016?

1) 1,200
2) 1,600
3) 2,400
4) 3,600

Answer 1

The taxpayer should report $800 of income in 2016.

Step-by-step explanation:

For accrual basis taxpayer, income is reported when it is earned, regardless of when it is received. In this case, the taxpayer entered into a contract to provide termite inspection service each month for 36 months starting from January 1, 2015. The amount received for the contract was $2,400. To determine the amount of income to be reported in 2016, we need to calculate the portion of the contract that has been earned. Since the contract is for a total of 36 months and 12 months of service will be provided in 2016, the taxpayer should report $2,400 / 36 * 12 = $800 of income in 2016.