Question

this year elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. the contract requires elizabeth to pay the consulting firm $1,450 for each instance that elizabeth requests its assistance. the contract also provides that elizabeth only pays the consultants if their advice increases efficiency as measured 12 months from the date of service. this year elizabeth requested advice on three occasions and she has not yet made any payments to the consultants.a. how much should elizabeth deduct this year under this service contract if she uses the accrual method of accounting?

Answer 1

Under the accrual accounting method, Elizabeth should record an expense of $4,350 for the three instances of consultant advice requested, regardless of payment being made, anticipating that the services will result in increased efficiency.

Step-by-step explanation:

Using the accrual method of accounting, Elizabeth should recognize expenses when services are rendered or when economic performance occurs, not necessarily when payment is made. Hence, even if she has not made any payments to the consultants this year, she should record the expenses incurred for the advice she has requested.

Since Elizabeth requested advice on three occasions, under the accrual basis, she would record an expense of $4,350 (3 advice requests × $1,450 per instance), provided that the services are expected to result in increased efficiency as stipulated in the contract. It is important to note that if the advice does not lead to increased efficiency within 12 months, she may need to adjust this accrual in the future.