Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase. In 2014, the company refunded $400,000 for claims involving sales. The $400,000 consisted of $350,000 in refunds from 2014 sales and $50,000 in refunds from 2013 sales. All of the refunds from 2013 sales were for claims filed in 2013 and were paid in January and February 2014. At the end of 2014, the company had $12,000 in refund claims for sales in 2014 for which payment had been approved. These claims were paid in January 2015. Also in January 2014, the company received an additional $30,000 in claims for sales in 2014. This $30,000 was paid by Gray in February 2015. With respect to the above, Gray can deduct:
A) $350,000 in 2014.
B) $362,000 in 2014.
C) $392,000 in 2013.
D) $442,000 in 2014.
E) None of the above.

Question

Quizplus · Accepted Answer

Gray can deduct the $350,000 in refunds from 2014 sales and the $12,000 in refund claims for 2014 sales that were approved and paid in January 2015. These total $362,000.

The $50,000 in refunds from 2013 sales that were paid in January and February 2014 cannot be deducted in 2014 because they relate to 2013 sales. Therefore, options A and D are incorrect.

The $30,000 in claims received in January 2014 for sales in 2014 cannot be deducted in 2014 because they were not paid until February 2015. Therefore, option C is also incorrect.

Overall, Gray can deduct $350,000 + $12,000 = $362,000 in 2014.

Gray Company, a Calendar Year Taxpayer, Allows Customers to Return