How much of this is gross income? Does it pass the all event test?

Question

In November of 2019, the corporation entered into a contract with a major retailer to provide $1,000,000 worth of product in 2020. The company was paid the full 1,000,000 in December 2019 but will not deliver the product until February 2020. The company will not recognize the 1,000,000 for book purposes until 2020.

Answer 1

Hi Sara,

The full amount of $1M received in the tax year is the gross income amount and is based on two criteria:  

1) The all events test is passed on the earliest date that one of the following occurs:

a. The company receives payment (Pass)

b. Income is earned (No Pass)

- income is not earned until the company provides the goods or services in 2020

c. The title of goods is passed to or service is provided to the customer (No Pass)

- the company has not yet delivered goods or services

2) The amount is determined with reasonable accuracy

- the amount was determined to be $1M

Additionally, the company will not recognize the $1M as Revenue on the current year Income Statement. Instead, it will be journaled as Deferred Revenue (a Liability) on the Balance Sheet because the company received the cash in advance and is now liable to provide the goods or services to the customer. After the goods or services are provided to the customer, the Deferred Revenue will be reclassified as Revenue on the Income Statement.