How should the loss and the reimbursement be reported


Response to the following problem:

Jerry sprayed all of the landscaping around his home with a pesticide in June of the current year. Shortly thereafter, all of the trees and shrubs unaccountably died. The FMV and the adjusted basis of the plants were $15,000. Later in the year, the pesticide manufacturer announced a recall of the particular batch of pesticide that Jerry used. It also announced a program whereby consumers would be repaid any damage caused by the improper mixture. Jerry is single and reports $38,000 AGI in the current year and $42,000 in the subsequent year.

a. Assume that in the current year Jerry files a claim for his losses and receives notification that payment of $15,000 will be received in the subsequent year; however, Jerry receives full payment for the damage in the current year. How should the loss and the reimbursement be reported?

b. How will your answer to Part a change if in the subsequent year the manufacturer files bankruptcy and Jerry receives $1,500 in total and final payment for his claim?

c. How will your answer to Part a change if the announcement and the reimbursement do not occur until late in the subsequent year, after Jerry has already filed his tax return for the previous tax year?

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Managerial Accounting: How should the loss and the reimbursement be reported
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