[jessanqi]

Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year:

Current rents $30,000
Advance rents for the next year $10,000
Non-refundable security deposits held in a segregated account $5,000
Lease cancellation payments $15,000

What amount is included in gross income?

The answer is $55,000. I know normally security deposit will be refund to the tenant, but the NON-refundable security deposit is not included in the gross income??

Can someone please kindly help!!
thank you!!

[Anonymous]

My thought would be that even though it's non-refundable, their damages can be taken out of it, so it's still considered a deposit held against future repairs. Then, if the tennants move out without causing any damages, it's income at that time.

Honestly I'd have gotten this question wrong, thinking “Non-refundable” meant “income when received”, but I think the thought process above must be how the deposits are counted.

[jessanqi]

Thank you for the response! 🙂

[mckan514w]

I think the clue to this one is “held in a segregated account”- this (at least to me) signals that the money has not yet been earned- i.e. if being held to cover damages, is being held until tenant actual moves in or out etc… essentially it is being restricted by being held in a separate account thus is not yet considered revenue.

DR Cash- restricted
CR Deferred Revenue

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[jessanqi]

Thank you for the help!

[Author]

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