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25 June, 12:37

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 $2,300,000. Jebali finished construction in 2019 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 2020, the dispute is settled and Jebali fixed the doorway at a cost of $65,000. a. How much must Jebali include in gross income

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  1. 25 June, 13:01
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    Jabeli must include = $2,220,000

    Explanation:

    As per the data given in the question,

    Gross Income in 2019 = $2,300,000 - $80,000

    = $2,220,000

    So, Jabeli should include $2,220,000 in gross income and Jabeli is allowed to deduct $2,100,000 in 2019

    In completed contact method of accounting:

    Till the contract is completed and accepted, no revenue from the contract is recognized

    In this case the purchaser may desire additional work to be done on a long term contract.

    The regulations do not provide any amount of income (or loss) until the dispute is resolved.
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