Nancy operates a business that uses the accrual method of accounting. In Decembe

Question

Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $7,800 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,900 of the bill by the end of year 0. However, Nancy paid the remainder of the bill in year

a. How much of the $7,800 consulting services will Hank include in his income in year 0 if he uses the cash method of accounting? What amount can Nancy deduct in year 0 for the consulting services?

b. How much of the $7,800 consulting services will Hank include in his income in year 0 if he uses the accrual method of accounting? What amount can Nancy deduct in year 0 for the consulting services?

Explanation / Answer

Req a: Case-1 Hank uses cash method and Nancy uses Accrual. Amount included in Hank revenue: 3900 (as only $3900 has been recived) Amount deducted by Nancy 7800 (as billing has been made in full) Case-2 when Both are using the Accrual method: Amount included in Hank revenue: 7800 (as he has performed services in full and billed) Amount deducted by Nancy 7800 (as billing has been made in full)

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