Wendy Inc is a cash method taxpayer who changes to the accru

Wendy Inc. is a cash method taxpayer who changes to the accrual method in 2017. Wendy\'s income computed under the accrual method for 2017 is $125,000. Wendy Inc.\'s books show the following balances:

12/31/2016

A/R $65,000

A/P $35,500

12/31/2017

A/R $32,500

A/P $10,700

a. What adjustment is necessary to Wendy Inc.\'s income?

b. How should Wendy, Inc. report the adjustment

Solution

A)-OKAY SINCE THE WENDY HAS CHANGED THE METHOD FROM CASH TO ACCURAL, WE WILL HAVE TO ADD UP ALL ACCRUED INCOME AND SUBTRACT ALL ACCRUED EXPENSES.BECAUSE IN ACCURAL METHOD INCOME IS DETERMINED ON ACCURAL BASIS I.E ALL INCOME ARE ADDED WHEN THEY GET ACCRUED AND ALL EXPENSES GET SUBTRACTED WHEN THEY ARE ACCRUED AND NOT WHEN THEY ARE ACTUALLY INCURRED UNLIKE CASH METHOD.

B)-SEE THE CALCULATION BELOW

A/R-65000-32500=32500(BALANCE OF CURRENT YEAR)

A/P-35500-10700=19800(BALANCE OF CURRENT YEAR)

ADJUSTMENTS=125000+32500-19800=137700 IS THE GROSS AMOUNT.