Ebali 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 $2,300,000. Jebali finished construction in 2016 at a cost of $2,100,000. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $80,000. In 2017, the dispute is settled and Jebali fixed the doorway at a cost of $65,000.

A) How much must Jebali include in gross income? What amount of deductions is Jebali allowed for 2016?

B) In 2017, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?

Question

Business

Moriah Odonnell

14 June, 03:13

Ebali 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 $2,300,000. Jebali finished construction in 2016 at a cost of $2,100,000. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $80,000. In 2017, the dispute is settled and Jebali fixed the doorway at a cost of $65,000.

A) How much must Jebali include in gross income? What amount of deductions is Jebali allowed for 2016?

B) In 2017, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?

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Answers (1)

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Frank Mays · Answer 1

2016 2017

Contract price = 2300000 2300000

Cost to date = (2100000) (2160000)

Further estimated Cost = (80000) 0

Profit = 120000 140000

Stage of completion = 2100/2180 = 96.33% 100%

As at Profit and loss

Revenue 2300*96.33 = 2215596.33 2300000

Profit 120*96.33 = - 115596.3303 - 140000

Cost of Sales = 2100000 2160000

For the period profit and loss

Revenue = 2215596 84404

Cost of sales = (2100000) 60000

Profit = 115596 24404