Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below.] Erin is considering switching her business from the cash method to the accrual method at the beginning of next year (year 1). Determine the amount and timing of her §481 adjustment assuming the IRS grants Erin's request in the following alternative scenarios a. At the end of year O/beginning of year 1, Erin's business has $18,000 of accounts receivable and $22,200 of accounts payable that have not been recorded for tax purposes Erin's $481 Adjustment by Number of year(s)

Explanation / Answer

a) Net adjustment is :-

= $18000 - $22200

= ($4200)

Net Income Decrease by $4200

Income decreasing adjustment = Erin deduct the full adjustment amount in year 1.

b) Net adjustment is :-

= $37500 - $17900

= $19600

Net Income Increase by $19600

Income Increasing Adjustment = 25% of Net Adjustment

= $19600*25%

= $4900

The Net adjustment ($4900) in taxable Income in each of the next four years beginning with year 1.

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