This year (year 0) 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 $1,500 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 in year 0 under this service contract if she uses the accrual method of accounting?
b. How much should Elizabeth deduct in year 0 under this service contract if she uses the cash method of accounting?