McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 75

Nancy operates a business that uses the accrual method of accounting.In December, Nancy asked her brother, Hank, to provide her business with consulting advice.Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,000 of the bill by the end of year 0.However, Nancy paid the remainder of the bill in year 1.a.How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the cash method of accounting? What amount can Nancy deduct in year 0 for the consulting services?
b.How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the accrual method of accounting? What amount can Nancy deduct in year 0 for the consulting services?