Friend has a small family farm, Schedule F filer, cash basis. Among other things, he raises and sells meat breed sheep. In 2006, he purchased several registered sheep which were to be placed in service and depreciated as breeding stock. (Since the sheep can be identified by their individual registration numbers, he has historically accounted for and reported each breeding stock sheep separately on depreciation schedules, rather than as a breeding stock herd.) Two of the sheep acquired in 2006 died shortly after receipt (apparent natural causes, possibly from stress of shipping.) Since the two dead sheep lived less than one year, they can't be depreciated.
How should he account for the dead sheep? Can the cost be taken as a 2006 expense?
He is attempting to negotiate replacement or refund from the seller. If the dead sheep can be expensed in 2006, how would he account for replacement or refund, if any, in 2007?