The Transfer Supply Company sells maintenance contracts to the purchasers of the

Question

The Transfer Supply Company sells maintenance contracts to the purchasers of the equipment they sell. The cost of the contract is $1,450, payable at the signing of the contract. The contract covers a three-year period with regularly scheduled inspection visits (every six months) plus any emergency visits. It is expected, on the average, on emergency visit per contract will be required each year. 2,200 contracts were sold on January 1, 2012 and two inspection visits are scheduled in 2012.

You have been asked by the management of Transfer to research the proper reporting of income from the contracts for GAAP, Federal Income Tax, and deferred tax accounting if there are differences between the GAAP and tax treatments.

Required: Prepare a research memorandum in good form.

FORMAT FOR MEMO:

FACTS:

ISSUES:

CONCLUSIONS: GAAP TREATMENT, FEDERAL INCOME TAX TREATMENT, DEFERRED TAX TREATMENT (if this is an issue)

SUPPORT:
-CITE AND EXPLAIN PRIMARY SOURCES IN GAAP THAT SUPPORT YOUR POSITION
-CITE AND EXPLAIN PRIMARY SOURCES IN FEDERAL INCOME TAX THAT SUPPORT YOUR POSITION
-CITE AND EXPLAIN PRIMARY SOURCES IN GAAP IF THERE ARE DEFERRED TAX ISSUES

appendix with calculations if you choose to not put these in the body of your memo

you may do your analysis on a single contract basis rathe than aggregate the 2,200 contracts

Explanation / Answer

Persons entering into commercial contracts are pretty much free to do anything that they can agree on. Each represents their own interests and can obligate themselves in any way they believe will benefit them. If one or both persons are represented by agents, usually employees, commercial contracting law allows the agent to form contracts based on generally accepted notions of commercial reasonableness. In essence, the law allows each side to rely on the other's authority to make a binding contract. Of course there are many nuances and cases covering this, but generally speaking the law favors the creation of commercial contracts in order to facilitate business. The powers given to the Government are set forth in the Constitution. The government exercises its powers through legislation and regulations issued as prescribed in legislation. Thus, the authority of a Contracting Officer (the Government's agent) to contract on behalf of the Government is set forth in public documents that a person dealing with the Contracting Officer can review. As a result, unlike in the commercial arena, where the parties have great freedom, a contract with the U.S. Government must comply with the laws and regulations that permit it, and be made by a Contracting Officer with actual authority to make the contract.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.