Ernlo is an accrual basis corporation with a June 30 fiscal year-end. On June 2, 2016, Ernlo entered into a binding contract to purchase a six-month supply of heating oil from a local distributor at the current market price of $12,450. This price is guaranteed regardless of the market price on the delivery date. Ernlo didn’t pay its $12,450 bill from the supplier until July 8, and the distributor delivered the oil on October 15.
a. In which taxable year can Ernlo deduct its $12,450 cost of heating oil if it doesn’t elect the recurring item exception as its method of accounting for this annual expense?
b. In which taxable year can Ernlo deduct its $12,450 cost for heating oil if it elects the recurring item exception?