[ab29]

Can someone dumb down the answer for me. I am having trouble understanding the mechanics behind the collectible account and how they deal with it. The answer I got was $2,440,000.

Company X reported rental revenue of 2,210,000 on its cash basis federal income tax return for the year ended 11/30/2. Additional information is as follows:

Rents Rec 11/30/2 1,060,000

Rents rec 11/30/1 800

Uncollectible rents written off during the year 30,000

Under accrual, what is rental revenue at 11/30/2?

Answer: 2,500,000

[tygolfer]

BEG: 800,000
+ XXXXXXX (2,500,000)
– 2,240,000 (2,210,000 + 30,000)
END: 1,060,000

You are basically solving for what was added to the receivable for the year, which would be the accrued revenue for the year. The key is understanding the fact that revenue under cash basis is what was collected, which will reduce your accrual under the accrual method. They also threw in a little trick with the write off. Remember that when you write off an uncollectible it would be a credit to the receivable.

AUD - 92
BEC - 84
FAR - 77
REG - 89

MDS CPA Review and Ninja MCQ for final review 2 weeks prior to each exam

 

[ab29]

Why did you add back the 30K to the rental revenue?

[sevenandfive]

I believe you add it back because under accrual method you had already set up an allowance for it. Under cash method you subtract it when you actually write it off. In other words, you use an allowance method for accrual and direct write-off under cash method

[tygolfer]

Don't think about it as “adding it back”. I only added it because it adds to the total amount you subtract from the receivable. You no longer are going to collect the rent, so you want to reduce the receivable by the write off amount (that is why it is in the subtract part of the equation).

Hopefully this helps.

AUD - 92
BEC - 84
FAR - 77
REG - 89

MDS CPA Review and Ninja MCQ for final review 2 weeks prior to each exam

 

[Author]

Replies