A3. Which of the following businesses must use the accrual method of accounting

Question

A3. Which of the following businesses must use the accrual method of accounting to account for all or a part of its operations? a. F Gas Corporation, a chain of 10 gas stations owned and operated by F. The corporation has average annual gross receipts of $13 million annually. The Clinic. This corporation is owned and operated by 80 physicians who provide a variety of health care services to the citizens of Houston. Annual billings to insurance companies and patients monthly exceed $20 million. b. c. Whitewater Rafting of Idaho is a partnership owned by B and T. Gross receipts d. D Drilling, a partnership owned by J and A. The partnership operates oil drilling Te. More than one of the above and these are for the past several years have averaged $100,000. rigs all over the world. Annual gross receipts consistently exceed $8 million. E- 4·The cash method of accounting may not be used by a solely owned personal service corporation in the management consulting business. a. b. individual engaged as a sole proprietor in a service business (inventory is not an the principal business activity) whose average annual gross receipts for all prior years exceed $6 million. c. a partnership of attorneys that has average annual gross receipts of $7 million. d. b and c. e. All of the above may use the cash method.

Explanation / Answer

1) Solution: F Gas Corporation, a chain of 10 gas stations owned and operated by F. The corporation has average annual gross receipts of $13 million annually

Explanation: Whenever inventories are an income producing factor, then normally accrual method is applicable to account for purchases, sales and inventories. For the F Gas station business, inventories are a material income producing factor and hence should use the accrual method at least in part. As a general rule, corporations have to use the accrual method unless the corporation has is a qualified personal service corporation or average annual gross receipts of less than $5 million. Clinic qualifies as a personal service corporation, and hence does not require using the accrual method. Unless they have a corporate partner, the partnerships are not required to use the accrual method. Thus neither drilling partnerships nor the rafting are required to use the accrual method.

2) Solution: All of the above may use the cash method

Explanation: Congress permits the cash method of accounting to be applied by: any individual (for instance a sole proprietor); partnerships that do not own C corporations as partners; partnerships or corporations when the annual gross receipts for all preceding years are not more than $5 million; certain farming businesses; and qualified personal service corporations in law, engineering, health, architecture, performing arts, accounting, actuarial science, or consulting

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