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

question 105

Essay

Derek Builders,LLC,entered into a contract to do extensive remodeling work on Helen's house in October 2016.The bid cost of the job was $5,000 and Helen made a down payment of $2,000 in November 2017.Because Helen was short of cash,Derek agreed to accept payment of the remaining $3,000 when she receives her tax refund in 2018.Derek completed the work on the contract in December.Helen dies in May 2018before 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 2019,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 2019.

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Definitions:

Growth Rate

The rate at which a company's earnings, sales, or dividends increase over a given period, usually expressed as a percentage.

Annual Dividend

A yearly payment made by a corporation to its shareholders, often derived from its earnings.

Required Rate

The minimum acceptable return on an investment, often used in capital budgeting and investment analysis.

Expected Growth Rate

The anticipated rate at which a company, investment, or value of an asset is expected to grow over a specified period.