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.
Required:
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.
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.

Answer 1

Answer:

(a) $1,200

(b) $330

Explanation:

(a)

• The advance payment was issued in 2018, however the items throughout 2018 were not shipped.
• The products were distributed throughout 2019 as well as the transaction for accounting information requirements was announced throughout 2019.

Therefore, in 2019, $1200 would include gross revenue  

(b)

Service contract for 6 months will be:

Drake would include gross income throughout 2019 of $120(40\times \frac{3}{6} )$ ($)and gross income throughout 2020 of $120. In October year 2019, because a corporation offered a 6-month contract, total sales in 2019 represented just a 3-month service agreement.

Service contract for 36 months will be:

• Throughout 2019 gross sales, Drake would include $120(= (= 1260\times \frac{6}{36} )$.The residual balance would not have been all conducted until the close including its tax year of collection since the contract became sold through 36 month.
• The residual amount of $1050 (= 1,260-210)$ is thus used throughout gross sales for 2020.  

Consequently,

⇒  Cumulative gross income used throughout 2019 = total earnings of 6 months service agreement + gross income of 36 months service agreement

⇒  $120 + 210$

⇒  $330$ ($)