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! Not secure : v2.cengagenow.com ahn.mnsu Watch TV ar Ch4 II eBook Calculator Print Item Problem 4-37 (LO. 2) 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 2017 gross income assuming that the company uses any available options to defer its taxes a. In December 2016, 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 2017, and Drake immediately delivered it to the customer. The sale was reported in 2017 for financial accounting purposes. 2017 gross income from transaction 1,200 b. In October 2017, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 in July 2017 Assuming a calendar year-end, 2017 gress income from the two transactions c. On December 31, 2017, 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. 2017 gross receipts from the transaction are and the gross profit from the transaction is Check My Work 1 more Check My Work uses remaining O Type here to search

Solution

1. gross rincome from transaction is $1200

2.gross income from both transactions

a) company sold 6 month contract worth $240 on october 2017, so permonth price of contract will be $240/6=$40, so for three month october-december the receipts wil be $40 x 3 = $120

b) company sold 36 months contarct worth $ 1260 on july 2017, so per month price of contract will $1260/36=$35. so for 6 months receipts will be $35 x 6 = $210,

Adding both $120+$210= $330 receipts from both transactions

3. since appliance is sold in 2017 so receipts from appliance i.e. $1200 will be included in the sales of the year 2017 and remaining balance(700+260) will be reflected in debtors account in next years and gross profit from the transaction will be $1200+$260-$750=$710

note: Interest will be included because company is maintaining accounts on accruel basis.