Question

Mike started a calendar year business on September 1st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?A. $12,000 under the cash method and $12,000 under the accrual methodB. $4,000 under the cash method and $12,000 under the accrual methodC. $12,000 under the cash method and $4,000 under the accrual methodD. $4,000 under the cash method and $4,000 under the accrual methodE. $4,000 under the cash method and zero under the accrual method

Answer 1

Answer:

C. $12,000 under the cash method and $4,000 under the accrual method

Explanation:

Under the cash basis of accounting, whenever an amount is received or paid, it is recognized in the books of accounts

Whereas, on the accrual basis of accounting, the cash received / payment or not it is recognized in the books of accounts. It is recorded when it is earned not when it is received or paid.  

So, by this above information

The cash method would recognize $12,000 ($1,000 × 12 months)

Whereas

The accrual method would recognize $4,000 ($1,000 × 4 months)

We assume the books are closed on December, 31