Answered: How much income does Peter have and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Peter Marwick, an accountant and accrual basis taxpayer, performed accounting services in Year One for Ellie Vader. Peter gave Ellie a bill for $30,000 in Year One. Ellie paid Peter $5,000 in Year One, but Ellie disputes that she owes the other $25,000 because she thinks his work is shoddy. Ellie agreed to put $25,000 in escrow until she and Peter could resolve their legal dispute over Peter's fees. In Year Three after litigation, the dispute is resolved in Peter's favor and he gets the money out of escrow. How much income does Peter have and when?

Question 9 options:

	Peter has $30,000 income in Year 1 because he is on the accrual method.
	Peter has no income in Year 1 because there is a contested liability.
	Ellie has $25,000 in cancellation of indebtedness income in Year 1.
	Peter has $5,000 income in Year 1 and $25,000 in Year 3 under the Claim of Right Doctrine.