LO.5 Rust Company is a real estate construction company with average annual gross receipts of $4 million. Rust uses the completed contract method, and the contracts require 18 months to complete.

a. Which of the following costs would be allocated to construction in progress by Rust?

1. The payroll taxes on direct labor.

2.

The current services pension costs for employees whose wages are included in direct labor.

3.

Accelerated depreciation on equipment used on contracts.

4.

Freight charges on materials assigned to contracts.

5.

The past service costs for employees whose wages are included in direct labor.

6.

Bidding expenses for contracts awarded.

b. Assume that Rust generally builds commercial buildings under contracts with the owners and reports the income by the completed contract method. The company is considering building a series of similar stores for a retail chain. The gross profit margin would be a low percentage, but the company’s gross receipts would triple. Write a letter to your client, Rust Company, explaining the tax accounting implications of entering into these contracts. Rust’s mailing address is P.O. Box 1000, Harrisonburg, VA 22807.