Question

Brittany, an accrual basis taxpayer, operates a small distribution business. Her records show the following income items for the year: Sales – paid, $64,000. Sales – unpaid, $2,750. Distributor-of-the-year prize from her supplier of $1,975. What amount does Brittany report as her gross income on her Schedule C?

Answer 1

Answer:

$68,725

Explanation:

1. In accounting and taxation, accrual basis implies that incomes of an entity must be recognized in period in which they are earned and all the expenses must also be recognized in the period in which they are incurred whether cash is paid immediately or not.

In the question, both the Sales – paid, $64,000 and Sales – unpaid, $2,750 must be recognized and used in our calculations despite that cash has been paid for Sales – paid, $64,000 but not for Sales – unpaid, $2,750.

2. In accounting and taxation, prize money are regarded as income and are subject to tax despite there is no exchange of goods and services. Therefore, distributor-of-the-year prize from supplier of $1,975 will be included in our calculation as part of the gross income.

From the explanation above, gross income can is therefore calculated as follows:

Gross Income = Sales-Paid + Sales-Unpaid + Distribution-of-the year Prize

Gross Income = $64,000 + $2,750 + $1,975

Gross Income = $68,725.

Answer 2

Her gross income is $65,975.00