Question

Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the company's 2019 gross income assuming that the company uses any available options to defer its taxes. a. In December 2018, the company received a $1,200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2019, and Drake immediately delivered it to the customer. The sale was reported in 2019 for financial accounting purposes. What amount is included in the 2019 gross income? b. In October 2019, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 In July 2019. Assuming a calendar year-end, what amount is included in the 2019 gross income? c. On December 31, 2019, the company sold an appliance for $1,200. The company received $500 cash and a note from the customer for $700 and $260 interest, to be paid at the rate of $40 a month for 24 months. Because of the customer's poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750. What amount is included in the gross receipts and what is the gross profit? The 2019 gross receipts from the transaction are $ and the gross profit from the transaction is

Answer 1

Answer :-

a)The amount $1,200 is included in the 2019 gross income.

Explanation :- The advance payment received in 2018 but the good not delivered in 2018 .The Good is delivered in 2019 And the sale was reported in 2019 for financial accounting purposes.Thus, $1200 will include in 2019 gross income.

b)The amount $ 330 is included in the 2019 gross income.

Explanation :-

For 6 month service contract: Drake will include $120 ($240x3/6) in 2019 gross income and $120 in 2020 gross income.As Company sold six month service contract in October 2019 .Thus in 2019 gross income ,only 3 month service contract is included.

For 36-month service contract: Drake will include $210 (=$1260 × 6/36) in 2019 gross income. The remaining balance will not be all performed by the end of the tax year of receipt as the service was sold for 36 month .So the remaining balance ie. $1,050 (=$ 1,260 - $210 ) is included in 2020 gross income.

Therefore ,Total gross income included in 2019 = Gross Income of 6 month service contract + Gross income of 36 month service contract.

Total gross income included in 2019 = $120 + $210 = $330

c)The Amount $ 1,200 is included in gross receipts and $450 is the Gross Profit

Explanation :-

On December 31, 2019, the company sold an appliance for $1,200. Therefore , Gross receipts is $ 1,200 as appliance was sale at that rate.

Interest of $260 to be paid at the rate of $40 a month for 24 months.So it will not included in the Gross income of 2019 it will include in gross income of 2020.

If we subtract the cost of appliance from sale price of appliance we get Gross Income of 2019

Gross income of 2019 = $1,200 - $750 = $450

The fair market value of the note was only $600 has no effect on taxpayer gross income.