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:6-42 Timing of Expense Recognition. Solutions Corporation, a computer vendor and consulting company, uses the accrual method of accounting. Its tax year is the calendar year. The following are three of the corporation‚s transactions during the current year: 1. Solutions Corporation hired a contractor to remodel its sales floor. The contractor completed the remodeling on November 30. On December 15, Solutions received a $21,000 bill from the contractor. Solutions immediately contacted the contractor to contest the $8,000 labor charge included in the total bill, which Solutions claims should only be $7,000. Solutions made no payment on the bill. 2. Solutions offer a 2-year warranty on all of its computer systems. For sales of computers in the current year, it paid $11,500 to service warranties during the current tax year, and it expects to pay $12,000 to fulfill the remaining warranty obligations next year. 3. Every year, Solutions offers a series of six trade seminars from November 1 through March 31. It receives all registration fees from participants by October 1, before the seminars begin. As of December 31, two of the six seminars are completed, and the next seminar is scheduled for January 14‚€œ15. The expenses incurred in performing the seminars are routine each year. On the first of each month from November through March, Solutions pays the $625 monthly rent for the seminar location. On September 16, Solutions signs a contract with the seminar teacher, a computers expert and excellent public speaker. The contract requires Solutions to pay the teacher $900 after each seminar, a total of $5,400. On October 3, Solutions signs a contract with a local printing company, which will provide text materials for the seminars. Solutions pay the printer $350 after each seminar‚s materials are delivered the day before the seminar. Required: a. How should Solutions Corporation treat these transactions? What rules apply? b. How would your answer change if Solutions Corporation were a cash-method taxpayer? I:6-43 Prepaid Expenses. Pamello, Inc., an engineering consulting firm, uses the cash method of accounting. Compute the amount of Pamello‚s current year deductions for the following transactions: a. On November 1 of the current year, it entered into a lease to rent some office space for five years. The lease agreement states that the lease payments are $12,000 per year, payable in advance each November 1 for the following 12-month period. Under the terms of the lease, Pamello is required to pay a $5,000 deposit, refundable upon the termination of the lease. b. On December 1 of the current year, Pamello also renewed its malpractice insurance, paying $18,000 for the three-year contract. c. On December 31 of the current year, Pamello mailed out a check for $5,000 for drafting services performed for it by an individual who lives in another city. d. On December 31, the firm received a shipment of $700 worth of stationery and other office supplies. Pamello has an open charge account with the office supply company, which bills the firm monthly for charges made during the year. e. Finally, on December 31, Pamello picked up some work that a local printing company had done for it, which amounted to $1,000. The firm charged the $1,000 with its corporate credit card.

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