Colbert Operates a Catering Service on the Accrual Method

question 15

Multiple Choice

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1ˢᵗ of year 1 through May 31ˢᵗ year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

• A) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.
• B) $500 is recognized in year 1 and $8,500 in year 2.
• C) $9,000 is recognized in year 3.
• D) $2,500 is recognized in year 1 and $6,500 in year 2.
• E) $9,000 is recognized in year 1.

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Definitions:

Lease Payments

Regular payments made by a lessee to a lessor for the use of an asset over a specified period as per a lease agreement.

Marginal Tax Rates

The tax rate applicable to the last dollar of income earned, reflecting the percentage of tax applied to your income for each tax bracket in which you qualify.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset evenly over its useful life.

Net Advantage to Leasing

This refers to the total financial benefits that a company might gain from leasing assets rather than purchasing them outright, taking into account tax advantages, cash flow, and risk factors.