37 LO2 Drake Appliance Company an accrual basis taxpayer sel

37. LO.2 Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transac- tions 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 froma 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. 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.

Solution

a. Since the applicance was delievered in 2017, it is income of 2017 and revenue will be recognized in 2017. In 2016, it will be shown as advance received only.

b. the advance payment would be spread over the useful life of the contract. Accordingly, gross income of $ 120 and $ 210 will be recognized only for contract 1 and 2

c FMV of note is not relevant for determining gross income. Company shall recognize gross income of $450 i.e. $ 1200-$ 750. The interest o $240 shall be taxed as it accrues.