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 2020 grocs income assuming that the company uses any available options to defer its taxes. a. In December 2019, 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 2020, and Drake immediately delivered it to the Customer. The sale was reported in 2000 for financial Accounting purposes. What amount is included in the 2020 gross income? b. In October 2020, the company sold a 6-month service contract for $240. The company also sold 36-month service contract for $1,260 in July 2020 Assuming a calendar year-end, what amount is included in the 2020 gross income? c. On December 31, 2020, 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 anciance was $750 What amount is included in the grass receipts and what is the grass profit The 2020 gross receipts from the transaction are and the gross profit from the transaction is

Answer 1

Requirement a:-

The amount included in 2020 Gross income is $1,200. The sale was completed in 2020 and hence Drake would record the income of $1,200 during 2020.

Requirement b:-

For the 6 months service contract sold in October, Drake will include $120 ($240 * 3 months/6 months) in 2020 Gross Income. For the 36 months service contract sold in July 2020, Drake will include $210 ($1,260 * 6 months/36 months) in the 2020 Gross Income.

Total Income included by Drake(2020) = $120 + $210 = $330

Requirement c:-

The cost of the appliance is $450 and the sale price of the appliance is $1,200. The Gross Profit is thus $750 ($1,200 - $450). The Fair market value is generally not included in determining the accrual method gross income of the taxpayer. The Interest is also not recorded during 2020 as it is to be earned only during 2021(first 6 months).

The 2020 gross receipts from the transaction is $1,200 and gross profit from the sale is $750.

Please let me know if you have any questions via comments and all the best :) !