Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2019, the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2019 sales and $50,000 in refunds from 2018 sales.All of the refunds from 2018 sales were for claims filed in 2018 and were paid in January and February 2019.At the end of 2019, the company had $12,000 in refund claims for sales in 2019 for which payment had been approved.These claims were paid in January 2019.Also in January 2020, the company received an additional $30,000 in claims for sales in 2019.This $30,000 was paid by Gray in February 2020.With respect to the above, Gray can deduct:
A)$350,000 in 2019.
B)$362,000 in 2019.
C)$392,000 in 2018.
D)$442,000 in 2019.
E)None of these.

Question

Quizplus · Accepted Answer

According to the accrual basis of accounting, expenses should be recognized in the period in which they are incurred, regardless of when the payment is made. The $400,000 refund expense for defective merchandise is recognized in the year in which the claims were filed, which is 2019.

Of the $400,000, $350,000 was for claims filed in 2019 and $50,000 was for claims filed in 2018. The $50,000 for 2018 claims was paid in January and February 2019 and is included in the $400,000 for 2019. Therefore, the total deductible amount for 2019 is $400,000 - $50,000 = $350,000.

In addition, the company had $12,000 in refund claims for 2019 sales at the end of 2019, which were paid in January 2020. These are deductible in 2019 as they were approved by the company in that year.

Furthermore, the $30,000 in claims received in January 2020 for 2019 sales were paid in February 2020 and cannot be deducted in 2019, but can be deducted in 2020.

Therefore, the total deductible amount for 2019 is $350,000 + $12,000 = $362,000. Option B is the correct answer.

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