Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with con- sulting advice. Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,000 of the bill by the end of year 0. However, Nancy paid the remainder of the bill in year 1.
a) How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the cash method of accounting? What amount can Nancy deduct in year 0 for the consulting services?
b) How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the accrual method of accounting? What amount can Nancy deduct in year 0 for the consulting services?