Hank's Gross Income Calculation from Alternative Transactions

What is Hank's gross income for this year from each of the alternative transactions? Under the cash method of accounting, income is generally recognized when received. Here's how Hank's gross income would be computed for each transaction:
  • a) Mike paid Hank $200 in cash in December of this year and promised to pay the remaining $300 with interest in three months.
  • b) Mike gave Hank tickets in December to the big game in January. The tickets have a face value of $50 but Hank could sell them for $400. Hank went to the game with his son.
  • c) Mike bought Hank a new set of snow tires. The tires typically sell for $500, but Mike bought them on sale for $450.

For transaction a, Hank's gross income for this year would be $200. The remaining $300 promised by Mike will be part of Hank's gross income in the year it is received.

Regarding transaction b, since Hank did not sell the tickets, their market value is not considered. Therefore, Hank's gross income from this transaction would be $0.

As for transaction c, the cost of the tires is considered income because it was in exchange for services Hank provided. Therefore, Hank's gross income from this transaction would be $500, which is the typical selling price of the tires.

Therefore, Hank's total gross income for this year would be $700, calculated by adding $200 (from transaction a) + $0 (from transaction b) + $500 (from transaction c).

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