During the last five months of the year, Dwana opens a new Internet telecommunications business called Dwan-Com. Dwan-Com bills $50,000 of revenues, but receives only $40,000 cash. Dwan-Com incurs $3,000 of supply expenses, and $41,000 of labor costs. Dwan-Com pays for $2,200 of the supplies and $38,000 of the labor costs in the current year.
a. What is Dwan-Com’s taxable income if it elects the cash method of accounting?
b. What is Dwan-Com’s taxable income if it elects the accrual method of accounting?
c. What method of accounting do you recommend that Dwan-Com elect?