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Accrual Basis Reporting

Acme Financial Services, Inc., an accrual basis taxpayer, was paid $3,000 in March for tax planning services it performed for Ed Snow. In July, Snow informed Acme that the services were not performed satisfactorily and that he wanted his money back. The dispute was not resolved before the end of the year. Early in the following year, Acme resolved the dispute by paying Snow $350 in full settlement of his claim. Which of the following statements concerning the income tax treatment of this transaction is correct?

  1. Acme must report the full $3,000 as income in the year it was paid.
  2. Acme must report income of $2,650 in the year the services were performed.
  3. Acme must report income of $2,650 in the year the claim was settled.
  4. Acme must report income of $3,000 less the amount disputed in the year the claim is made.