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The taxpayer had incorrectly been using the cash method of accounting
The taxpayer had incorrectly been using the cash method of accounting. For 2019, the company voluntarily changed to the accrual method, with the permission of the IRS. The unrealized receivables at the beginning of 2019 totaled $80,000. The unrealized receivables as of the end of 2019 totaled $160,000. As a result of the change in method for 2019, the IRC § 481 adjustment under the most favorable treatment will cause the company to:
a) Increase its income for 2019 by $160,000.
b) Increase its income for 2019 by $80,000.
c) Increase its income for 2019 by $30,000.
d) Increase its income for 2019 by $40,000.
e) Increase its income for 2019 by $20,000.
Expert Solution
Increase its income for 2019 by $80,000.
Option a. is correct.
Explanation:
They are not following accrual principal so this will be added in income of 2018. If they were follow the principal then this would be considered as income of 2018. Also the income of 160,000 will already be considered as per actual principle so it is not an adjustment for change in principle.
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