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Problem 4-24 (10. 2) Your client is a new partnership, ARP. Associates, which is an engineering consulting firm, Generally, ARP bills clients for services at the end of each month. Client billings are about \$50,000 each month. On average, it takes 45 days to collect the recelvables. ARP's expenses are primarily for salary and rent. Salaries are paid on the last day of each month, and rent is paid on the first day of each month. The parthership has a line of credit with a bank, which requires monthly financial statements. These must be prepared using the aceruat method. ARP's managing partner, Amanda Sims, has suggested that the firm also use the accrual method for tax purposes and thus reduce accounting fees by $600. The partners are in the 35% (combined Federal and state) marginal tax bracket. Complete the letter to your client which outlines which method should be used for its tax return. I am responding to your sugpestion that ARP Associates change to the accrual method of accounting for tax purposes as a means of reducing accounting fees. Under the accrual method of accounting, receivables as income as the services are performed. This is to be contrasted with the cash method of accounting, where income is recognized Each year under the , accelerated tax payments would occur so long as the billing and collection pattem remains the same. Therefore, the partners will pay tax on an additional x in the first year's income, and those payments will not be recovered until the company ceases its operations. Assuming the partners are in the 35% marginal tax bracket, the deferred taxes under the are X. If the partners earn a return, or greater, on the deferred taxes, the additional accounting fees will be recovered. Therefore, 1 recommend that you method. The partnership required to use the accrual method for tax purposes. Sincerely

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