Question

Problem 2 (5 points) Home Office, Inc., an accrual basis taxpayer, leases a copying machine to a new customer on December 27, Year 1. The machine was to rent for $500 per month for a period of 36 months beginning January 1, Year 2. The customer was required to prepay 6 months rent at the time the lease was signed on December 27, Year 1. The customer was also required to pay a $2,000 damage deposit at the time the lease was signed. The damage deposit will be returned to the taxpayer at the end of the lease if no damage occurs. Determine the amount of gross income Home Office recognizes in Year 1.

Answer 1

Solution:

On the basis of accrual basis of accounting in given question below two transaction is incurred,

Unearned Revenue: In this Home Office Inc. received advance from customer against Leasing of Copying Machine at the end of year 1 and service is started from the year 2 it means all the amount received in the Year 1 is as advance and shown as unearned revenue at the year end.

So there is no income is recognise in year 1 from advance receipt of 6 month.

Damage Deposit: This is advance from customer for any damage in copying machine. This will be returned to customer if there is no damage. It means this amount is also not in nature of revenue so no income is accrued from damage deposit also.

Answer =

Amount of Income recognized by Home office in year 1 = Nil