11) When is the following income derived? 
(a) A karate instructor opened a karate school on 1 July CY and received fees in advance. 
However, where the full courses of lessons were not taken pupils received a refund. Fees received 
during the year amounted to $26,500. Fees received during the year in respect of lessons still to be 
taught amounted to$1,500. 

 

 

 

12. How much income is derived in the current year 
(b) Alanis a dentist who operates with the assistance of a full-time receptionist and 2 part-time 
dental therapists. Alan has issued bills of $500,000 of which he has received $450,000. Of the 
remaining $50,000, $22,000 represents work done for which the clients have arranged to pay off the 
bill in monthly instalments. The remaining $28,000 represents amounts on invoices sent out but not 
yet due. In addition to the $450,000 Alan also received $52,000 on amounts outstanding from last 
year and $15,000 time payments.

(a)

The $25,000 will be derived in the current year and the remaining $1,500 will be derived when the services are fully offered to the students.

(b)

$487,000 will be derived in the current year due to the accrual method of accounting.

Step-by-step explanation

There is different situation where one can say they have derived income, in some situation, income is considered driven when the income is earned and, in some situation, income is derived when services are offered or both. These factors pay an important rule since they help determine whether the taxpayer will adopt the accrual method and or cash method of accounting. Generally, small company are advised to adopt the cash method and huge ones to use the accrual. Cash basis considered income to have been derived when income is earned and accrual when services are secured.

(a)

Since the school allow for the refund of amounts that the services are not offered, the accrual method will not be suitable and amount will not be considered derived when income is earned, only until the service is delivered. Therefore, for this case, we will adopt the cash method and only constitute income that the services have been offered. So, the full fees received will not be assessable in that year, rather only the amount that their services have been offered.

26500 - 1500 = 25000

So, the amount assessable in the year will be $25,000 while the $1,500 will remain in the account it will only be assessable when the services have been completed. This because there is a chance for refund.

(b)

For this case, since the company services are offered than one more person, then the business does not solely depend on one person. Therefore, it will adopt the accrual method so any amount received by the company which it has offered the service for will be considered assessable. So, the $450,000 bill already paid and offered service for will be assessable. Secondly, the amount which will be paid by monthly instalments will be assessable because the services have already been offered. Meaning the company has every right to collect the amounts. For, the amount which is not yet due, it will be assessable when the time is due so, we will not count it in the year accounts. The amounts outstanding from last year will be assessed on last year accounts. However, for time payments, it will be assessable in the current or the year which it has come due (it will be this year for our case).

Assessable amount = 450000 + 22000 + 15000

                                = 487000