The Wren Construction Company reports its Federal taxable income by the completed contract method. At the end of 2022, the company completed a contract to construct a building at a total cost of $800,000. The contract price was $1,200,000, 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 they 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 2023, 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 2022 and 2023?

b. Same as part (a), except that Wren had incurred $1,100,000 of accumulated costs under the contract at the end of 2022.