Good afternoon,

Please see below for the question and my answer in bullet point. Please let me know if there are any adjustments needed to my answer. Thank you!

1. Polonius is in the business of making plastic skulls and uses the accrual method of accounting. He occasionally retains his son Laertes, a lawyer, to perform routine legal services. Laertes uses the cash method of accounting. On December 15, Polonius received a bill from Laertes for services rendered during the month of November. The bill states that it is due and payable by December 31. The end-of-year rush makes Polonius fall behind on his paperwork and he does not get around to writing the check for Laertes until January 2 of the following year. When can Polonius deduct the payment of Laertes bill? When must Laertes include the amount in income?
   • Polonius uses the accrual method of accounting and must recognize the expense when services are rendered by Laertes. Since the fact of the liability and the amount can be determined with reasonable accuracy and economic performance, Polonius can deduct the expense in the previous year even though payment was not remitted until January. For Laertes, he must recognize the income in January once the payment is received because he uses the cash method of accounting.