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Accrual Accounting for Taxation

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Solutions Corporation, a computer vendor and consulting company, uses the accrual method of accounting. Its tax year is the calendar year. The following are three of the corporation's transactions during the current year:

1. Solutions Corporation hired a contractor to remodel its sales floor. The contractor completed the remodeling on November 30. On December 15, Solutions received a $21,000 bill from the contractor. Solutions immediately contacted the contractor to contest the $8,000 labor charge included in the total bill, which Solutions claims should only be $7,000. Solutions made no payment on the bill

2. Solutions offers a 2-year warranty on all of its computer systems. For sales of computers in the current year, it paid $11,500 to service warranties during the current tax year, and it expects to pay $12,000 to fulfill the remaining warranty obligations next year.

3. Every year, Solutions offers a series of six trade seminars from November 1 through March 31. It receives all registration fees from participants October 1, before the seminars begin. As of December 31, two of the six seminars are completed, and the next seminar is scheduled for January 14-15. The expenses incurred in performing the seminars are routine each year. On the first of each month November through March, Solutions pays the $625 monthly rent for the seminar location. On September 16, Solutions signs a contract with the seminar teacher, a computers expert and excellent public speaker. The contract requires Solutions to pay the teacher $900 after each seminar, a total of $5400. On October 3, Solutions signs a contract with a local printing company, which will provide text materials for the seminars. Solutions pays the printer $350 after each seminar's materials are delivered the day before the seminar.

1. How should Solutions Corporation treat these transactions? What rules apply?
2. How would the answers change if Solutions Corporation were a cash-method taxpayer?

Please remit the answer and explanations to each transaction.

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Solution Summary

This solution discusses the impact of accrual accounting in taxation.

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One piece that might be helpful not in the document is a small explanation of the phrase "All Events". That phrase means that the transacations are known both in time and amount.

The question of " All Events" in terms of warranty the amount is definitely in question because the actual breaking of materials can not be known precisely in either amount or timing.

In the seminar section the "All Events" test can be reasonably concluded to be the correct treatment and the paragraph sections in the Master ...

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