Brown Thumb Landscaping is a calendar-year accrual-method taxpayer. In September Brown Thumb negotiated a $14000 contract for services it would provide
to the city in November of the current year. The contract specifies that Brown Thumb will receive $4000 in October as a down payment for these services
and it will receive the remaining $10000 in January of next year.
a. How much income from this $14000 contract will Brown Thumb recognize in the current year? Explain.
b. How much income from this $14000 contract will Brown Thumb recognize in the current year if it uses the cash method of accounting?
c. Suppose that the total amount to be paid under the contract with the city is estimated at $14000 but may be adjusted to $12000 next year during the
review of the city budget. What amount from the contract if any should Brown Thumb recognize as income this year? Explain.
d. Suppose that in addition to the basic contract Brown Thumb will be paid an additional $3000 if its city landscape design wins the annual designer
competition next year. Should Brown Thumb accrue $3000 revenue this year? Why or why not?
