Derek Builders,LLC,entered into a Contract to Do Extensive Remodeling Work

question 2

Essay

Derek Builders,LLC,entered into a contract to do extensive remodeling work on Helen's house in October 2012.The bid cost of the job was $5,000 and Helen made a down payment of $2,000 in November 2013.Because Helen was short of cash,Derek agreed to accept payment of the remaining $3,000 when she receives her tax refund in 2014.Derek completed the work on the contract in December.Helen dies in May 2014 before she had paid Derek.Because Helen was heavily in debt when she died,the executor of Helen's estate told Derek that he would be lucky to get $1,000 when the estate was settled.
a.Derek Builders uses the accrual method of accounting.Based on the income tax concepts,explain how Derek should account for the contract.
b.In 2015,Derek Builders receives $1,500 from Helen's estate as final payment on the $3,000 amount owed.Based on the income tax concepts,explain how Derek should treat the $1,500 receipt in 2015.

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Definitions:

Prospectus

A formal document that companies and investment funds issue to potential investors, detailing important facts about the investment offering.

CFO

The Chief Financial Officer, a senior executive responsible for managing the financial actions of a company.

Bonds

Fixed-income investments representing a loan made by an investor to a borrower, typically corporate or governmental.

Security

A financial instrument representing an ownership position in a publicly-traded corporation (stock), a creditor relationship with a government or a corporation (bond), or rights to ownership as represented by an option.