What is the proper way to recognize income for Teal company?

Is Teal company an accrual basis taxpayer?

Yes, Teal company is an accrual basis taxpayer.

When did the customer pay for the item?

The customer paid for the item on December 1, 2017.

When was the item delivered to the customer?

The item was delivered to the customer on January 4, 2018.

For which year should Teal recognize the income based on financial accounting purposes?

Teal must recognize the income in 2017.

Answer:

A. Teal must recognize the income in 2017.

Teal company, being an accrual basis taxpayer, must recognize income when it is earned, regardless of when the payment is actually received. In this case, the customer paid for the item in December 2017, but wanted it delivered in January 2018. Even though the delivery took place in 2018, Teal included the sale in its 2017 income for financial accounting purposes. This is in line with the accrual basis of accounting where revenue is recognized when it is earned, not necessarily when the cash is received.

By recognizing the income in 2017, Teal is following the principle of matching revenue with the expenses incurred to generate that revenue. This helps in presenting a more accurate picture of the company's financial performance for the period in question.