Question

WFO Corporation has gross receipts according to the following schedule: Year 1 $22.50 million Year 2 $24.50 million Year 3 $26.50 million Year 4 $25.00 million Year 5 $25.50 million Year 6 $27.50 million If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method

Answer 1

Answer: Year 6

Explanation:

The Company is required to use the Accrual method when the average gross receipts become greater than $25 million.

Year 1 Average = $22.50 million

Year 2 Average = (22.5 + 24.5) / 2 = $23.5 million

Year 3 Average = (22.5 + 24.5 + 26.5) / 3 = $24.5 million

Year 4 Average = (22.5 + 24.5 + 26.5 + 25) / 4 = $24.625 million

Year 5 Average = (22.5 + 24.5 + 26.5 + 25 + 25.50) / 5 =  $24.80 million

Year 6 Average = (22.5 + 24.5 + 26.5 + 25 + 25.50 + 27.50) / 6 = $25.5 million

Average gross income crosses the $25 million limit in Year 6 so the company will have to start using the Accrual method from Year 6.