Question

Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson Inc., under a long-term contract. The gross contract price was $3,077,500. Jebali finished construction in 2018 at a cost of $2,769,750 However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing doorway is $139,550. In 2019, the dispute is settled and Jebali fixed the doorway at a cost of $111,640. a. How much must Jebali indude in gross income? What amount of deductions is Jebali allowed for 2018? Jebali must includes in gross income and is allowed deductions of $ for 2018 b. In 2019, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year? In 2019, Jebali must includes gross income and may deduct $ as expenses in that year.

Answer 1

Answer :-

a)Jebali must include $ 2,937,950 in gross income and is allowed deductions of $2,769,750 for 2018.

b)In 2019, Jebali must include $139,550  gross income and may deduct $111,640 as expenses in that year.

As per rule the completed contract method, no revenue from the contract is recognized until the contract is completed and accepted.

Here Jebali finished construction in 2018 at a cost of $2,769,750. Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $139,550.

In some situations, the contract price may be disputed when buyer may want additional work to be done on along-term contract.

Here also the contract price would reduced to $2,937,950 (=$3,077,500 - $139,550)

which includes in gross income for 2018. And Cost of Construction $2,769,750 is allowed as deduction in 2018.

In 2019 ,Dispute is settled as a result the estimated cost of redoing the work ie.$139,550 is included in gross income and the Jebali Fixed at the cost of $111,640 which deducted as expense.