Question

On Dec. 15, 2019, Julia’s Service Station, an accrual-method taxpayer, prepaid $4,000 worth of deductible interest on a business loan. The interest won’t accrue until 2020.Julia’s Service Station will be displaying for the first time at a trade show in July 2020. On Dec. 16, 2019, Julia’s prepaid the $8,000 trade show booth rental expense. The paymentisn’t due until May 2020, and use of the booth will occur in July 2020.In addition, On Dec. 28, 2019, Ed’s Equipment repaired some equipment in Julia’sbusiness and billed Julia’s $2,000. Julia’s received the invoice on Dec. 28, 2019 and paid the $2,000 invoice on Jan. 29, 2020.

In addition to the $14,000 in expenses, some of the equipment used in Julia's Service Station's business requires ongoing maintenance estimated to cost $30,000 every 3 years. In 2019, for financial accounting purposes, Julia's accrues a maintenance expense of $10,000. The maintenance will not be performed until 2021, and Julia's will not pay forthe maintenance until after the work is performed.How much of the maintenance expense may Julia’s Service Station deduct in 2019?

Answer 1

Julia's Service Station would be able to deduct maintenance expense of 26000.

Equipment repaired	2,000
Other repair expense	14,000
Accrual for Maintenance contract	10,000
Total Deduction	26,000

Under an accrual method of accounting, you generally report income in the year it is earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year

Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.

1. The all-events test has been met. The test is met when:

a. All events have occurred that fix the fact of liability, and

b. The liability can be determined with reasonable accuracy.

2. Economic performance has occurred.

In view of above principles, the expense of 10000 for 3 year maintenance contract is allowable as an expense in 2019.