[WI_11]

I’m a little confused about income accural for C corps. If the C corp is large enough are they actually taxed on the accural amount. I thought all tax returns were reconciled to the cash basis(m-1). The explination on the becker software you lead me to think they are taxed on the accrued amount?

Thanks in advance

AUD 89
BEC 84
FAR 87
REG 94!! ALL DONE

[32CPA]

I think the thought (I assume you are referring to deferred taxes) is that the company will EVENTUALLY be taxed on the accrual amount… over time. Are you speaking from a FAR perspective? Or Reg?

BEC - Pass 10/2010
FAR - Pass 10/2010
AUD - Pass 11/2010
REG - Pass 05/2011

[32CPA]

Well, never mind, I see you are studying currently for REG. I haven't taken REG yet, but I am a corporate tax guy with 10 years of exp. Sch M-1/M-3 (in practice) isn't a reconciliation to cash basis. In fact, some C-corps are so small they aren't required to do M-1 or M-3. A smaller C-corp is merely able to post their taxable income directly to 1120 Pg 1 and provide book/tax differences upon audit. They are not posting their taxable income on the accrual basis, they just don't have to reconcile on the form. There are still book-to-tax differences. For instance, a small c-corp may have accounts receivable (A/R) with an associated allowance and bad debt expense. However, the bad debt expense and recording of allowance is a non-cash event for federal income tax purposes and the company reverses the bad debt expense (add back to taxable income) and only records bad debt expense on the direct method (when a write off actually occurs or a recovery occurs). Even though this company doesn't have to provide a temp/perm difference rec, they still have to report at that amount (direct).

If you are a little more specific about your question, I'd be happy to help.

BEC - Pass 10/2010
FAR - Pass 10/2010
AUD - Pass 11/2010
REG - Pass 05/2011

[WI_11]

ok here is the situation for reg

a C corp, and accural basis taxpayer, reported net receivables of 35,000 and 25,000 on its year 2 and year 1 balance sheet. During year 2 the C corp collected 50k in cash and 5k in nonrefundable deposits. The questions asks what should be the C corps taxable income.

I chose 55k because I am thinking all taxpayers are cash basis (50k+5K nonrefundable = 55k). But the ans(65k) includes the difference in beg and end a/r balances. So according to this question they are including accural income #'s into taxable $.

AUD 89
BEC 84
FAR 87
REG 94!! ALL DONE

[studyingismynewhobby]

Watch for the question to say if the taxpayer (or company) is accrual or tax basis. Your example notes the Corporation is accrual basis taxpayer. A corporations do not have to be ‘tax basis' they can be accrual or a modification of cash/tax. The corp elects which it wants to be taxed as on Schedule K Other Information, (page R3-9) in our Becker book.

FAR - 87
AUD - 88
BEC - 88
REG - waiting

[32CPA]

Gotcha. I think you may be missing what's going on in this question. Yes, the company is paying on a theoretical cash basis. But, if you think about it from a FAR perspective, you are converting from the accrual to cash method. Using the Journal Entry method of converting accrual sales to cash sales this is what you'd do:

DR:Cash 65k

CR:A/R 10k

CR:Cash Sales 50k

CR:NonRefund 5k

Therefore, during 2010, the company had cash sales of $65k.

The way I've always done things like this is to look at the change in A/R (10k decrease) and assume that this is converted to cash… In order for the beginning balance of 35k to become 25k, a credit to A/R had to occur for 10k What would the other side of that entry be? Debit cash 10k. The cash collections were given, as was the nonrefund. When the 50k and 5k were collected, they debited cash for 55k, and credited cash sales 50 and nonrefund 5. So it's not that the IRS is accounting for beginning and ending A/R, its just assumed that the A/R was collected as cash… this is just a method to find the answer. Using a T account would do the same.

BEC - Pass 10/2010
FAR - Pass 10/2010
AUD - Pass 11/2010
REG - Pass 05/2011

[32CPA]

Remember that for Cash Method purposes… a decrease to A/R (accrual sales) is an increase to cash sales. The decrease implies you collected cash (which the IRS loves).

You are paying tax based on the amount of cash collected during the year regarding sales activity. I'd suggest anytime you are looking at an accrual to cash method, just do a journal entry so that all of your items increase or decrease the cash account. The change will be your cash sales.

I know I'm over explaining, but this is something that will benefit you everytime you do a tax return… The American government loves cash… when you get some (receive), they want a piece of it. When you spend some (pay), they go to someone else to get a piece.

FYI… the SchK question that he/she is referencing above… that's not to elect to be taxed on the accrual or cash method. Companies cannot elect HOW they are going to be taxed. That question is merely stating how your books are kept. You are just saying “I keep accounting records on the accrual basis.” This is just informative. Not elective.

Don't let the exam fool you into multiplying book income (NIBT) times the tax rate to get your tax expense.

BEC - Pass 10/2010
FAR - Pass 10/2010
AUD - Pass 11/2010
REG - Pass 05/2011

[WI_11]

32CPA_ Thanks for all the info

I think I messed up because they “gave me” the 50k in cash sales, and I took that as the given total for the year (since it kind of was). Some times its hard to decifer was is a distractor and what isnt.

but bottom line the accural C-corp is taxed on cash collected, not accrued A/R.

AUD 89
BEC 84
FAR 87
REG 94!! ALL DONE

[studyingismynewhobby]

Are you sure you don't read the question as:” it states reported net receivables of 35,000 and 25,000 on its year 2 and year 1 balance sheet.”

Year 2 35,000

Year 1 25,000.

Which would mean A/R increased by $10,000 not decreased.

The distractor being most people would state year 1 information first, and year 2 information second.

The corp is an accrual based taxpayer so there were:

50k Cash sales

10k A/R sales

5k nonrefundable deposit.

65k Total.

If I'm way off in left field please let me know, I test in 3 weeks and I just want to understand this information and the answer key doesn't always provide enough information.

FAR - 87
AUD - 88
BEC - 88
REG - waiting

[WI_11]

studyingismynewhobby_

The question says the co reported rent receivables of 35k and 25 k for years 2 and 1 balance sheets. during the 2nd year the co. received 50k in rent payments and 5k in nonrefundable deposits. In co's yr 2 tax return, what amount should be included in rent revenue.

so rent receivable did go up from yr 1 to yr 2. Which would mean accural sales/income goes up, not cash.

I dont understand 32cpa's “journal entry to convert from accural to cash” the company never received 65k in cash so why would they dr cash for 65k?

AUD 89
BEC 84
FAR 87
REG 94!! ALL DONE

[WI_11]

the ans says..

rent rev under the accural basis would be 50k plus the increase in rent rec of 10k plus the 5k. I would agree with this, but the questions ask's “in co's yr 2 TAX return, what amount should be included in rent revenue?

I must be missing something, is the reportable rent rev 65k, but the taxable amount 55k reconsiled on m-1?

AUD 89
BEC 84
FAR 87
REG 94!! ALL DONE

[32CPA]

I apologize, I read your question backwards (as a CPA candidate, I should be better than that :)).

I was thinking that Yr 1 was 35k and Yr 2 was 25k, but it was the other way.

Eitherway, the JE method works… under the cash method (tax reporting has rents when paid, not receivable, and a non-refundable deposit is considered sales for tax purposes).

Dr:Cash Received (1) 55,000

Dr:A/R (2) 10,000

Cr:NonRefund (cash sales) (3) 5,000

Cr:Cash Sales (4) 60,000 Plug

(1) if this was your pocket, how much cash was put in your pocket in this question? $50k collections and $5k nonrefund.

(2) your A/R increased $10k, so you'd debit your A/R… for proof your BASE calc is:

Beg 25,000 (given)

Add 60,000 (plug)(accrual sales)

Sub 50,000 (collections)

End 35,000 (given)

Under the accrual method, you would have:

To record sales on credit:

dr: A/R 60,000

cr: Sales 60,000

To record cash collection of A/R:

dr: Cash 50,000

cr: A/R 50,000

To record cash collection of nonrefund deposit:

dr: Cash 5,000

cr: Def Rev 5,000

(3) NonRefund Deposit revenue/sales… if this were the accrual method, this would not have been a credit to sales, it would have been a liability (deferred revenue). But for tax purposes, it is considered cash income (rental income)… creating a deferred tax asset. So for the Year 2 tax period, it is income that is taxed.

(4) Cash sales is the plug. 3 & 4 could have been combined into one cash sales account.

If you start the question from scratch… how much cash did you receive? debit 55k. How much did your A/R change? debit 10k. The 5k is considered cash sales for tax. What's left to balance your JE? 60k. 60k sales, plus 5k non-refund = $65k.

The company will be taxed on $65k.

Under the accrual method, the company's sales (assuming no other activitiy) would have only been $60k. In order to have A/R END with $35k, 60k of cash sales had to occur, not all of the cash sales were in receivables, some were cash sales at the point of sale (this method isolates that). The question is saying that the A/R department collected $50k of A/R during the year. It's not saying that was all of the sales in the current period. (this would be a lot easier if I had a chalkboard).

If you take all of my Accrual Method JE's above and net them together, you get:

dr: Cash 55,000

dr: A/R 10,000

cr: Cash Sales 60,000

cr: Nonrefund 5,000

That's why I said instead of doing all of those JE's to find out what the overall cash method is… look at your cash collected, take your overall change in A/R… the rest are cash sales for tax purposes.

(Please read all of this with a nice sounding voice… it's hard to type a nice sounding voice, so my explanations probably sound stern when read on the screen)

BEC - Pass 10/2010
FAR - Pass 10/2010
AUD - Pass 11/2010
REG - Pass 05/2011

[32CPA]

Also, from an M-1 perspective it would be:

60,000 Ln 1: NIBT

5,000 Temp: Def Rev (Ln4)

65,000 Ln 10:Total Taxable income

x 35%

22,750 tax expense.

BEC - Pass 10/2010
FAR - Pass 10/2010
AUD - Pass 11/2010
REG - Pass 05/2011

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