Balance Sheet Question

[AccTaxMan]

An LLC hired a contractor to do a job in 2012. Because of cash flow problem, the contractor agreed to be paid by installments. The cost of the whole job is $60,000. The LLC pays the contractor $2500 per month. The LLC paid the contractor for 4 months in 2012 at the total of $10,000. So at the end of 2012, there was still $50,000 to be paid off in the next two years. The contractor agreed not to charge interest on the balance due.

I want to clarify the following points. Please correct me if you think I am incorrect:

(1) The LLC can only claim $10,000 as expense in 2012.

(2) The LLC claims the expense in the next two years based on what it actually pays the contractor in the respective year.

(3) On the balance sheet of the LLC, there is a liability of $50,000 at the end of 2012.

Anything that I have thought incorrectly?

[ChEAr$]

An LLC hired a contractor to do a job in 2012. Because of cash flow problem, the contractor agreed to be paid by installments. The cost of the whole job is $60,000. The LLC pays the contractor $2500 per month. The LLC paid the contractor for 4 months in 2012 at the total of $10,000. So at the end of 2012, there was still $50,000 to be paid off in the next two years. The contractor agreed not to charge interest on the balance due.

I want to clarify the following points. Please correct me if you think I am incorrect:

(1) The LLC can only claim $10,000 as expense in 2012.

(2) The LLC claims the expense in the next two years based on what it actually pays the contractor in the respective year.

(3) On the balance sheet of the LLC, there is a liability of $50,000 at the end of 2012.

Anything that I have thought incorrectly?

Since you say a "contractor", that must mean something like a building built, or machine constructed, right?

The entire 60,000 is debited to the building account and 10,000 credited to cash with the remaining 50,000 showing as a liability. Yeah, that works. But the building/machine is placed in service in 2012 and eligible for depreciation on the 60,000.

Or are there other circumstrances?

[AccTaxMan]

Since you say a "contractor", that must mean something like a building built, or machine constructed, right?

The entire 60,000 is debited to the building account and 10,000 credited to cash with the remaining 50,000 showing as a liability. Yeah, that works. But the building/machine is placed in service in 2012 and eligible for depreciation on the 60,000.

Or are there other circumstrances?

I used "contractor" for simplicity sake. The $60,000 is actually architectural fee. What happened is that the LLC hired an architect for a project. The architect has completed the works in 2012. But due to case flow problem, the LLC and the architect argeed on the installment plan as I explained in the first post.

Now what made it complicated is that no construction works has started yet (again due to the cash flow problem). In this situation, how should the $60,000 architect's fee be handled?

[BOB W]

The $60,000 is part of whatever is being built, debit Asset (Capitalized). Then Credit a Payable account for $60,000. The payable account is debited for each $2,500 payment. a 1099 is issued for the $10,000 paid.

[AccTaxMan]

The $60,000 is part of whatever is being built, debit Asset (Capitalized). Then Credit a Payable account for $60,000. The payable account is debited for each $2,500 payment. a 1099 is issued for the $10,000 paid.

Nothing is being built because the construction works had not been started yet even today. Should the $60,000 architectural fees start to be depreciated in 2012 even though nothing had been done and only $10,000 had been paid? The LLC is on cash basis.

[BOB W]

No Depreciation until the project is completed in all aspect or until placed in service. In some respects, it is like inventory
waiting to be used.

[AccTaxMan]

No Depreciation until the project is completed in all aspect or until placed in service. In some respects, it is like inventory
waiting to be used.

Thank you. What about if they decide to give up the project so they will not do anything? In this case, does the $60,000 architectural fees start to be depreciated in the year that the decision of abandoning the project is made?

[geekgirldany]

Similar to what home builders do in carrying their projects as inventory until sold. If the project is abandoned later then the total amount paid would be moved from inventory to expense.