Exercise 18-35 (Algorithmic) (LO. 5)

Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a long-term contract. The gross contract price was $6,223,500. Jebali finished construction in 2019 at a cost of $5,601,150. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $93,150. In 2020, the dispute is settled and Jebali fixed the doorway at a cost of $74,520.

a.How much must Jebali include in gross income? What amount of deductions is Jebali allowed for 2019?

b.In 2020, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?