Reference no: EM13972766
Determine whether the taxpayer in each of the following situations has a claim of right to the income received:
a. Sulley's Spa Spot sells hot tubs that have a 2-year warranty. The warranty provides for the replacement of all parts and the cost of labor to replace the parts. In addi- tion, Sulley's may replace the hot tub in lieu of repairing it. During the current year, Sulley's hot tub sales total $250,000. Sulley's estimates that 10% of all hot tubs sold will require warranty work.
b. In 2008, Retro Fit Construction Company purchased equipment by borrowing $100,000 from Fifth State Bank. After paying off $30,000 of the loan, Retro has fi- nancial problems in the current year and cannot afford to make its regular pay- ment. Rather than have Retro default on the loan, Fifth State Bank agrees to reduce the debt to $50,000.
c. Larry's Lawncare Service provides lawn mowing and fertilization services to resi- dential customers. Customers can pay by the month, or they can purchase a one- season contract for $1,000. The contracts obligate Larry's to provide the necessary mowing and fertilization from April through October. In September, Larry's has a ‘‘pre-season'' sale that lets current customers purchase next season's contract for
$800. Fourteen customers buy the discounted contract in September.
d. Alexander Associates does computer consulting for Bertman, Inc., in September. Bertman pays Alexander's $3,000 bill for the work in October 2010. In late No- vember, Bertman's computer system crashes and Bertman sues Alexander, seek- ing reimbursement of $3,000. The lawsuit is scheduled for court in March 2011.
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