Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a longterm 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? What amount of deductions is Jebali allowed for 2019?

b. In 2020, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?

Answer / Explanation:

Lets first define revenue: This can be defined or refers to the income a company generated from the business normal operations. It is mostly referred to as business operational profit

Gross contract price = $2, 300,000

Jebail finished construction in 20219 at cost = $2,100,000

Estimated price for re-doing the door way = $ 80,000

Jebali fixed the door way in 2020 at cost $ 65,000

(a) First of, we calculate forthe revenue by subtracting the gross contract price from the estimated price of re-doing the door way:

That is:

Revenue = 2300000 - 80000

= 2,220,000

So now, we calculate for the less expense:

Thus, that will be: Revenue - cost at whcih jebali finished construction in 2019

That is: 2,220,222 - 2,100,000

= 120,000 which is now the GP for 2019

(b) To calculate for the amount of expense jebali can deduct that year, we subtract the cost jebali fixed the door after the dispute from the initial estimated price for actually redoing the door way in 2020

Therefore, $80,000 - $ 65,000

= $15,000 GP

Hence, $ 15,000 GP represents the reported in amount deducted in in 2020