On April 1, Ivy Corp. began operating a service company with an initial cash investment by...

The Cash basis of accounting records revenue and expenses only when it is received or paid respectively. The company has received income for services in May of $3,200,000 and hence included in the income before taxes. The amount of investment by shareholders will be included in the equity part and the dividend payment will be made through retained earnings.

Hence, Income before taxes under Cash basis of accounting will be $3,200,000.

The Accrual basis of accounting records revenue when the services are provided or goods are delivered. Its records expenses when it becomes due. So, the income before taxes under accrual basis of accounting will be:

{eq}\begin{align*}{\rm\text{Income}}\,{\rm\text{before}}\,{\rm\text{tax}}\,{\rm\text{for}}\,{\rm\text{two}}\,{\rm\text{months}}&={\rm\text{Income}}\,{\rm\text{for}}\,{\rm\text{service}}\,{\rm\text{provided}}\,{\rm\text{in}}\,{\rm\text{April}} -{\rm\text{Expenses}}\,{\rm\text{in}}\,{\rm\text{April}}\\&= \$ \,3,200,000 - \$ \,1,500,000\\&= \$ \,1,700,000\end{align*}\ {/eq}