Question

Murphy Company, a cash-basis, calendar-year taxpayer, received a call on December 28, year 1, from a client stating that a check for $9,000 as payment in full for their services can be picked up at their offices, two blocks away, any weekday between 1:00 and 6:00 P.M. Murphy does not pick up the check until January 3, year 2. In which year does Murphy recognize the income?

Answer 1

Answer:

Murphy Company

The year in which Murphy recognizes the income is year 2.

Explanation:

As a cash basis taxpayer, Murphy Company reports income and deductions in the year that they are actually paid or received.  Similarly, as a cash basis taxpayer, Murphy Company deducts expenses in the year the expenses are paid off, which is not necessarily the year they were incurred.  The income for services of $9,000 rendered to a customer, for which payment was received on January 3, year 2, will be recognized in year 2 and not in year 1 when the services were performed.