1 36 Hour Fitness is a calendar year accrualbasis taxpayer O

1. 36 Hour Fitness is a calendar year, accrual-basis taxpayer. On October 1, 2017, 36 Hour Fitness sold a 12-month private training contract for $2,400. The client paid the full amount in cash. The service period covers October 1, 2017 to September 30, 2018. • For tax purposes, if 36 Hour Fitness wants to defer income recognition (to the extent allowed by tax law), how much income it should recognize in 2017? In 2018?

2.36 Hour Fitness is a calendar year, accrual-basis taxpayer. On October 1, 2017, 36 Hour Fitness sold a 24-month private training contract for $4,800. The client paid the full amount in cash. The service periods covers October 1, 2017 to September 30, 2019. • For tax purposes, if 36 Hour Fitness wants to defer income recognition (to the extent allowed by tax law), how much income it should recognize in 2017? In 2018? In 2019?

Solution

Solution 1:

As per taxation provisions, generally advance payment for services to be performed in later tax year is taxable in the year in which advance is received. However, for certain services, if advance payment is received for services to be performed in next tax year, you can elect to postpone advance payment in income until next year. However, you cannot postpone any payment beyond that tax year.

In the present situation 36 hour fitness received $2400 for services to be performed during Oct 1 2017, to Sept 30,, 2018.

Therefore value of services to be performed in 2017 = $2.400*3/12 = $600

Value of services to be performed in 2018 = $2,400*9/12 = $1,800

Therefore 36 hour fitness may defer advance payment of $1,800 up to 2018.

Income to be recognized in 2017 = $600

Income to be recognized in 2018 = $1,800

Solution 2:

As per taxation provisions, generally advance payment for services to be performed in later tax year is taxable in the year in which advance is received. However, for certain services, if advance payment is received for services to be performed in next tax year, you can elect to postpone advance payment in income until next year. However, you cannot postpone any payment beyond that tax year.

In the present situation 36 hour fitness received $4800 for services to be performed during Oct 1 2017, to Sept 30, 2019.

Therefore value of services to be performed in 2017 = $2.400*3/12 = $600

Value of services to be performed in 2018 = $2,400

Value of services to be performed in 2019 = $2,400*9/12 = $1,800

Therefore 36 hour fitness may defer advance payment of $4,200 ($2,400 + $1,800) up to 2018.

Income to be recognized in 2017 = $600

Income to be recognized in 2018 = $4,200

Income to be recognized in 2019 = Nil