In year 1 , Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate.  In year 2, Brun determined that the exact amount was $12,000.  Which of the following statements is correct?
A. Brun is required to notify the IRS within 30 days of the determination of the exact amount of the item.
B. No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.
C. The $2,000 difference is includible in Brun’s year2 income tax return.
D. Brun is required to file an amended return to report the additional $2,000 of income.
Answer:C
Choice "c" is correct. Under the accrual basis of accounting, when you include an amount in gross income on the basis of a reasonable estimate, and you later determine the exact amount, the difference (if any) is taken into account in the tax year in which the determination is made. Therefore, in this case, the additional $2,000 is included in Brun's Year 2 income.
Choice "d" is incorrect. There is no requirement to file an amended return as a result of an inaccurate but reasonable estimate of income in a prior year.
Choice "a" is incorrect. There is no requirement to notify the IRS.
Choice "b" is incorrect. The additional $2,000 must be included in income in Year 2. The 25% rule cited pertains to unintentional underreporting of income and its effect on the statute of limitations, increasing it from 3 to 6 years.