Ebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a long-term contract. The gross contract price was $2,300,000. Jebali finished construction in 2016 at a cost of $2,100,000. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $80,000. In 2017, the dispute is settled and Jebali fixed the doorway at a cost of $65,000.

A) How much must Jebali include in gross income? What amount of deductions is Jebali allowed for 2016?
B) In 2017, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?

Explanation:

                                                   2016                                   2017

Contract price                   =     2300000                           2300000

Cost to date                       =    (2100000)                         (2160000)

Further estimated Cost    =     (80000)                                    0

Profit                                   =    120000                                140000

Stage of completion         =  2100/2180 = 96.33%                 100%

As at Profit and loss

Revenue    2300*96.33      =   2215596.33                           2300000

Profit           120*96.33        =   -115596.3303                          -140000

Cost of Sales                       =    2100000                                2160000    

For the period profit and loss

Revenue                              =     2215596                           84404

Cost of sales                       =    (2100000)                          60000                                

Profit                                    =     115596                                24404