2) Lamont uses the accrual method of accounting for his calendar-year computer s

Question

2) Lamont uses the accrual method of accounting for his calendar-year computer sales and repair business. For tax purposes,

(a) how should Lamont account for the following transactions; and

(b) would your answers change if Lamont were a cash basis taxpayer?

(i) During 2015, Lamont hired a contractor to remodel his store. The remodeling was completed on November 28. On December 13, Lamont received a $20,000 bill from the contractor. He immediately contacted the contractor to contest the $7,000 labor charge included in the bill, which Lamont claims should only be $5,000. Lamont did not pay any amount to the contractor.

(ii) Lamont provides a one-year warranty on all of its computers. For computer sales during 2015, he paid $12,500 to service warranties during 2015, and he expects to pay $14,000 to fulfill the remaining 2015 warranty obligations in 2016.

Please provide answers with as thorough explanation as possible. I'm trying to understand the material. Please don't copy paste any other answers from the same question asked. Thank you!

Explanation / Answer

a. i. As Lamont is following accrual system of accounting the contractor bill should be completely booked with $20000. adjustment for any change in the invoice amount would be made in the year the adjustment is comfimed.

ii. the warranty amount already paid should be booked in the current year only and for the balance 14000 a provision should be created in the books.

b. i. Had Lamont was following cash system nothing will be booked for contract expense as nothing is paid against the invoice. expense will be booked once contractor bill is paid.

ii. only $12500 will be booked as expense and no provision be booked.

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