Question

3. John Deere is operated as a C corporation. The company received an order for a $12,000 tractor from a customer on June 30, 2020 and delivered the tractor to the customer on July 31, 2020. The company sent the customer a bill saying they had to pay for the tractor by no later than January 31, 2021. John Deere uses a calendar year tax period. Based on phone calls with the customer in December of 2020, the customer explained that it may have to file bankruptcy proceedings but was trying to work its way out of financial hardship before taking that option. The customer said that at worst it would be able to pay at least $9,000 of the bill. On January 15, 2021, John Deere received a check from the customer for $9,000 and was informed it would receive no additional payment based on the outcome of the bankruptcy case. In addition to the transaction above, the following occurred:

• A different customer paid for the same type of tractor (at $12,000) on November 1, 2020 and scheduled delivery for January 15, 2021. John Deere included the income in its 2020 financial accounting statements.
• The company both incurred and paid expenses for the following in 2020:
  • Wages:                                                                               $3,000
  • Rental costs for a warehouse:                                            $4,000
  • Repairs:                                                                              $2,000
• The company both incurred and paid expenses for the following in 2021:
  • Wages:                                                                               $4,000
  • Rental costs for a warehouse:                                            $4,000
  • Repairs:                                                                              $3,000

1. (9 points) Assuming the local John Deere’s operates on a calendar year-end under the accrual method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2020?
   
2. (9 points) Assuming the local John Deere’s operates on a calendar year-end under the accrual method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2021?
   
3. (9 points) Assuming the local John Deere’s operates on a calendar year-end under the cash method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2020?
   
4. (9 points) Assuming the local John Deere’s operates on a calendar year-end under the cash method and prefers to defer income whenever possible, what amount of net profit (loss) for tax purposes in 2021?
   
   
   
   (8 points) How should the sum of the 2020 and 2021 accrual method net profit (loss) total relate to the sum of the 2020 and 2021 cash method net profit (loss) total (i.e. how should the sum of your answers in a. and b. relate to the sum of your answers in c. and d.)?
5. Circle the best answer below.
   i. The sum of the two years for the accrual method should be greater than the sum of the
       two years under the cash method.
   ii. The sum of the two years for the accrual method should be less than the sum of the
       two years under the cash method.
   iii. The sum of the two years for the accrual method should be equal to the sum of the
       two years under the cash method.
   

Answer 1

Given Data
A]
Received an order worth $ 12000 for a Tractor on 30.06.2020
Expected Delivery Date 31.07.2020.
Due date as per Bill 31.01.2021
15th Januvary 2021 received $9000 against Billing of $12000
B]
A different customer paid same price on 01.11.2020
Scheduled delivery 15.01.2021
a] Expenses incurred in 2020.
Particular	Amount ($)
Wages	3000
Rental cost	4000
Repairs	2000
Total Expenses	9000
Loss	9000
As there were no Income Generated in 2020 hence the total expenses
incurred are the loss for 2020.
b] Expenses Incurred & Profit Earned in 2021
Particular	Amount ($)
Wages	4000
Rental cost	4000
Repairs	3000
Total Expenses (A)	11000
Sales	12000
Forfeited Amount	9000
Total Revenue (B)	21000
Profit (B -A) = ( C )	10000
A) Sales $ 12000 from other Customer are booked in 2021 as the Scheduled
delivery date is Jan 15 2021. As the Ownership & title transfered on 15th Jan 2021.
B) Amount of $ 9000 received on January 15 2021 forfieted by the company
as the customer declared himself as Bankcrupt.

The Above result are same irrespective of method of Accounting (i.e. Cash or Accrual Method). Because in both cases the title and ownership Of Tractor are transferred in 2021 & hence income will be deferred till acutal transfer of Ownership & title.

As per GAAP the revenue should not be booked if there were any uncertainty exist in collection of the amount against transfer of Ownership & title.It should be deferred to that extent where the collection of amount is certain.

Hence in the given case both revenue (i.e. Forefeited Revenue & Sales Revenue) are booked in 2021

e iii)  The sum of the two years for the accrual method should be equal to the sum of the
    two years under the cash method as all accounting are done in 2021 & there were no changes in 2020.