Colby Motors Uses the Accrual Method and Reports on a Calendar

question 35

Essay

Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?

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Definitions:

Geologic Setting

The physical, geological, and environmental context of an area, including its rock types, structures, and past geologic events.

Metamorphism

The process by which the mineral composition and texture of rocks are changed by exposure to heat and pressure.

Metamorphic Process

A geological process that alters the composition or structure of rock due to heat, pressure, or the presence of fluids, without the rock melting.

Rotation

The act or process of an object spinning around an axis.