In 2023In 2023, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000, and inventory on hand totaled $320,000. Enter the Federal income tax adjustment due to the chang...
In 2023, the taxpayer became ineligible to use the cash method of accounting.
At the beginning of the year, accounts receivable totaled $240,000, accounts
payable for merchandise totaled $80,000, and inventory on hand totaled
$320,000. Enter the Federal income tax adjustment due to the change in
accounting method and its effect on net income.
Answer & Explanation
When a taxpayer becomes ineligible to use the cash method of accounting and
must switch to the accrual method, an adjustment is required to account for the
differences between these methods. This adjustment is known as a Section
481(a) adjustment.
Here's how you calculate it:
1. Accounts Receivable: Under the cash method, income is recognized
when received. Under the accrual method, income is recognized when
earned. Therefore, accounts receivable of $240,000 that were not
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