McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 64

Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer.In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year.The contract specifies that Brown Thumb will receive $4,000 in October as a down payment for these services and it will receive the remaining $10,000 in January of next year when the city budget is reviewed.a.How much income from this $14,000 contract will Brown Thumb recognize in the current year? Explain.b.How much income from this $14,000 contract will Brown Thumb recognize in the current year if it uses the cash method of accounting?
c.Suppose that the total amount to be paid under the contract with the city is estimated at $14,000 but may be adjusted to $12,000 next year during the review of the city budget.What amount from the contract, if any, should Brown Thumb recognize as income this year? Explain.d.Suppose that in addition to the basic contract, Brown Thumb will be paid an additional $3,000 if its city landscape design wins the annual design competition next year.Should Brown Thumb accrue a $3,000 revenue this year? Why or why not?