Bigham Corporation, an accrual basis calendar year taxpayer, sells its services under 12-month and 24-month contracts. The corporation provides services to each customer every month. On July 1, 2016, Bigham sold the following customer contracts:

Length of Contract 12 months and 24 months Total Proceeds $14,000 (12 months) $24,000 (24 months) (

Determine the income to be recognized in taxable income in 2016 and 2017.

Answer: 2016 = $13,000; 2017 = $25,000

Explanation:

for 2016

Income to be recognised in 2016 for 12 months term = Total proceeds x period of service provided (july - december) / Total contract term

Income to be recognised in 2016 = 14,000 x 6months / 12months

= 14,000 x 1/2 = $7,000

Income to be recognised in 2016 for 24 months term = Total proceeds x period of service provided (july - december) / Total contract term

Income to be recognised in 2016 = 24,000 x 6months / 24months

= 24,000 x 1/4 = $6,000

income to be recognized in taxable income in 2016 = $7,000 + $6,000 = $13,000

for 2017

Income to be recognised in 2017 for 12 months contract term = Total proceeds x remaining period of service provided from jan. to june 2017 / Total contract term

Income to be recognised in 2017 = 14,000 x 6months / 12months

= 14,000 x 1/2 = $7,000

Income to be recognised in 2017 for 24 months contract term = Total proceeds x remaining period of service provided fromjuly 2016 - dec 2017 / Total contract term

Income to be recognised in 2016 = 24,000 x (24-6) 18months / 24months

= 24,000 x 3/4 = $18,000

income to be recognized in taxable income in 2017 = $7,000 + $18,000 = $25,000