Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At

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Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At the end of the year (2019), the company hires you to convert the cash receipts and disbursements into accrual basis revenues and expenses. The total cash receipts are summarized as follows.

Cash sales.......................................................$150,000
Collections on accounts receivable...............350,000
Bank
loan............................................................90,000
Total cash receipts.........................................$590,000

The accounts receivable from customers at the end of the year are $120,000. You note that the accounts receivable at the beginning of the year were $190,000. The cash sales included $30,000 of prepayments for services to be provided over the period January 1, 2019, through December 31, 2021.

a. Compute the company’s accrual basis gross income for 2019.

b. Would you recommend that Blue use the cash method or the accrual method? Why?

c. The company does not maintain an allowance for uncollectible accounts. Would you recommend that such an allowance be established for tax purposes? Explain.

Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
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South-Western Federal Taxation 2020 Comprehensive

ISBN: 9780357109144

43rd Edition

Authors: David M. Maloney, William A. Raabe, James C. Young, Annette Nellen, William H. Hoffman

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