Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under

Question

           Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a ten-year lease expiring August 31, Year 8. On January 2, Year 2, Mott paid $25,000 as consideration for cancelling the lease. On November 1, Year 2, Nare leased the building to Pine under a five-year lease. Pine paid Nare $10,000 rent for the two months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 2 income tax return. (Points : 4)        $10,000
       $15,000
       $40,000
       $45,000

Explanation / Answer

Choice "c" $40,000 is correct. Prepaid rent is income when received even for an accrual-basis taxpayer. The $25,000 received as consideration for cancelling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month's rent is also rental income

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