Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2010,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2010 sales and $50,000 in refunds from 2009 sales.All of the refunds from 2009 sales were for claims filed in 2009 and were paid in January and February 2010.At the end of 2010,the company had $12,000 in refund claims for sales in 2010 for which payment had been approved.These claims were paid in January 2011.Also in January 2011,the company received an additional $30,000 in claims for sales in 2010.This $30,000 was paid by Gray in February 2011.With respect to the above,Gray can deduct:
A)$350,000 in 2010.
B)$362,000 in 2010.
C)$392,000 in 2010.
D)$442,000 in 2010.
E)None of the above.

Question

Quizplus · Accepted Answer

Gray Company can deduct the $350,000 in refunds from 2010 sales in 2010. The $50,000 in refunds from 2009 sales that were paid in January and February 2010 are considered a prior year's refund and must be deducted in the year they were incurred, which is 2009. Additionally, the $12,000 in refund claims for 2010 sales that were paid in January 2011 are considered a current year refund and must be deducted in 2011. However, the $30,000 in claims for 2010 sales that were paid in February 2011 can be deducted in 2010 because they were paid within 60 days after the end of the tax year, which is the safe harbor rule for deducting refunds. Therefore, the total deductible amount for refunds in 2010 is $350,000 + $30,000 - $50,000 (prior year's refund) = $362,000.

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