The Winimucca Supply Company sells maintenance contracts to the purchasers of the equipment they sell. The cost of the contract is $1,450, payable at the signing of the contract. The contract covers a three-year period with regularly scheduled inspection visits (every six months) plus any emergency visits. It is expected that, on the average, one emergency visit per contract will be required each year. 2,200 contracts were sold on January 1, 2009 and two inspection visits are scheduled in 2009.
You have been asked by the management of Winimucca to research the proper reporting of income from the contracts for GAAP, Federal Income Tax and deferred tax accounting if there are differences between the GAAP and tax treatments.
Required:
Prepare a research memorandum in good form.