Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2015,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2015 sales and $50,000 in refunds from 2014 sales.All of the refunds from 2014 sales were for claims filed in 2014 and were paid in January and February 2015.At the end of 2015,the company had $12,000 in refund claims for sales in 2015 for which payment had been approved.These claims were paid in January 2015.Also in January 2015,the company received an additional $30,000 in claims for sales in 2015.This $30,000 was paid by Gray in February 2016.With respect to the above,Gray can deduct:
A)$350,000 in 2015.
B)$362,000 in 2015.
C)$392,000 in 2014.
D)$442,000 in 2015.
E)None of the above.

Question

Quizplus · Accepted Answer

Gray Company can deduct the amount of refunds paid during the year, which includes both refunds from current year sales and refunds from prior year sales that were paid during the year. Therefore, Gray can deduct:

$350,000 (refunds from 2015 sales paid in 2015)
+ $50,000 (refunds from 2014 sales paid in Jan-Feb 2015)
+ $12,000 (refund claims for 2015 sales paid in Jan 2016)
= $412,000

However, Gray also received $30,000 in refund claims for 2015 sales in January 2015, but these were not paid until February 2016. Therefore, they cannot be deducted in 2015.

So, the correct option is (B) $362,000 in 2015.

Gray Company,a Calendar Year Taxpayer,allows Customers to Return Defective Merchandise