LO.5 The Wren Construction Company reports its income by the completed contract method. At the end of 2012, the company completed a contract to construct a building at a total cost of $800,000. The contract price was $1.2 million, and the customer paid Wren $900,000. However, the customer refused to accept the work and would not pay anything else on the contract because he claimed that the roof did not meet specifications.

Wren’s engineers estimated that it would cost $140,000 to bring the roof up to the customer’s standards. In 2013, the dispute was settled in the customer’s favor; the roof was improved at a cost of $150,000, and the customer accepted the building and paid the remaining $300,000.

a. What would be the effects of the above on Wren’s taxable income for 2012 and 2013?

b. Same as (a), except that Wren had $1,100,000 accumulated cost under the contract at the end of 2012.