On January 1, 2017, 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. The taxpayer should report $1,600 of income in 2018.

Question

Quizplus · Accepted Answer

The taxpayer should recognize the revenue over the term of the contract based on the percentage of completion method. For a 36-month contract, each month represents 1/36th of the total contract. Therefore, in 2018 (the second year of the contract), the taxpayer should recognize 1/36th of the total revenue ($2,400) for that year, which equals $1,600.

On January 1, 2017, an Accrual Basis Taxpayer Entered into a Contract