Question

Bigham Corporation, an accrual basis calendar year taxpayer, sells its services under 12-month and 24-month contracts. The corporation provides services to each customer every month. On July 1, 2019, Bigham sold the following customer contracts:
Length of contract Total Proceeds
12 months $40,000
24 months $80,000
Determine the income to be recognized in taxable income in 2019 and 2020.
Length of Contract 2019 Income 2020 Income
12 months $ $
24 months $ $

Answer 1

Answer: See explanation

Explanation:

Length of contract: 12 months

Income recorded in 2019:

= $40,000 × 6/12

= $40,000 × 1/2

= $20,000

Income recorded in 2020:

= $40,000 × 6/12

= $40,000 × 1/2

= $20,000

Length of contract: 24 months

Income recorded in 2019:

= $80,000 × 6/24

= $80,000 × 1/4

= $20,000

Income recorded in 2020:

= $80,000 × 18/24

= $80,000 × 3/4

= $60,000