Jennifer uses the cash method. Which of the following transactions result in gro
ID: 2469584 • Letter: J
Question
Jennifer uses the cash method. Which of the following transactions result in gross income in the current year?
a. Car, worth $7,000, received as a consulting fee
b. $500 of interest credited to his checking account, but not withdrawn
c. Wages payable from a corporation with ample funds, in which he is a 12 percent shareholder, unpaid at year-end
d. Stock, worth $20,000, for services rendered, fully vested if Jennifer still works for the corporation in three years
e. $700 of dental services (bill cancelled upon Jennifer’s estate planning advice to the dentist’s mother-in-law)
f. Sale of a used car for a note due in one year, face value $3,000, fair market value $2,500. No elections were made.
Explanation / Answer
The cash method of accounting requires that sales be recognized when cash is received from a customer, and that expenses are recognized when payments are made to suppliers. This is a simple accounting method, and so is attractive to smaller businesses.
a. Car, worth $7,000, received as a consulting fee
Fee for services are received in kind
b. $500 of interest credited to his checking account, but not withdrawn
As the amount has not been withrawn, it will not be considered under cash system until withdrawn.
c. Wages payable from a corporation with ample funds, in which he is a 12 percent shareholder, unpaid at year-end
As the wages are still payable and have not been paid by the ccorporation yet, it will not affect the gross income for the current year.
d. Stock, worth $20,000, for services rendered, fully vested if Jennifer still works for the corporation in three years
Non-monetary fee received shall not be accounted for in the current year under cash method.
e. $700 of dental services (bill cancelled upon Jennifer’s estate planning advice to the dentist’s mother-in-law)
No cash transaction resulted, thus, no impact on gross income.
f. Sale of a used car for a note due in one year, face value $3,000, fair market value $2,500. No elections were made.
No amount has been received in exchange of the used car, rather a note due in one year. Thus, will not be accounted for in cash method.
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