The Transfer Supply Company sells maintenance contracts to the purchasers of the equipment they sell. The cost of the contract is $1,450, payable at the signing of the contract. The contract covers a three-year period with regularly scheduled inspection visits (every six months) plus any emergency visits. It is expected, on the average, on emergency visit per contract will be required each year. 2,200 contracts were sold on January 1, 2012 and two inspection visits are scheduled in 2012.
You have been asked by the management of Transfer to research the proper reporting of income from the contracts for GAAP, Federal Income Tax, and deferred tax accounting if there are differences between the GAAP and tax treatments.
Required: Prepare a research memorandum in good form.
FORMAT FOR MEMO:
CONCLUSIONS: GAAP TREATMENT, FEDERAL INCOME TAX TREATMENT, DEFERRED TAX TREATMENT (if this is an issue)
-CITE AND EXPLAIN PRIMARY SOURCES IN GAAP THAT SUPPORT YOUR POSITION
-CITE AND EXPLAIN PRIMARY SOURCES IN FEDERAL INCOME TAX THAT SUPPORT YOUR POSITION
-CITE AND EXPLAIN PRIMARY SOURCES IN GAAP IF THERE ARE DEFERRED TAX ISSUES
appendix with calculations if you choose to not put these in the body of your memo
you may do your analysis on a single contract basis rathe than aggregate the 2,200 contracts