Question

In 2019, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to Chaya that have a fair market value of $22,000 at year-end. In addition, Chaya sold a 36-month service contract on June 1, 2019, and received payment in full of $12,000. How much income does Chaya report from these transactions in 2016? Round any division to four decimal places. If required, round your final answer to the nearest dollar.

Answer 1

Answer: $27,333

Explanation:

Data:

Amount earned = $25,000

Amount received = $12,000

Using accrual method of accounting, income and expenses are recognized as it is being made or earned irrespective of the amount of cash paid or received.

Fair market value = payment received * 7/36

= $12,000 * 7/ 36

= $2333.333

Chaya reported income = amount earned + fair market value

= $25,000 + $2333.333

= $27,333.