Required information IThe following information applies to the questions display

Question

Required information IThe 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 Part 2 of 2 007/0.2 points awarded Determine the amount and timing of her 5481 adjustment assuming the IRS grants Erin's request in the following alternative scenarios Scored b. At the end of year O/beginning that have not been recorded for tax purposes of year 1. Erin's business reports $41,400 of accounts receivable and $15,800 of accounts payable eBook Print Reterences 6.400 Increase in net income by Number of yeare)

Explanation / Answer

Erin is required to make necessary 481 adjustments to make sure that she doesnt omit any receivables and payables from the taxable income for the financial year under the acctual method of accounting.

At the end of year 0/beginning of year 1, Erin's businenss reports $41,400 worth of accounts receivables and $15,800 accounts payables, which is not recorded for tax purpose. Here, as per IRC 481 adjustments, Erin needs to increase the net income by $25,600 ($41,400 - $15,800). As it is an income increasing adjustments, Erin needs to include 25% of the net adjustments in the taxable income for next four years.

25% of $25,600 = $6400.

Increase in net income = $25,600

Number of Years = 4yrs

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