Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase. In 2018, the company refunded $400,000 for claims involving sales. The $400,000 consisted of $350,000 in refunds from 2018 sales and $50,000 in refunds from 2017 sales. All of the refunds from 2017 sales were for claims filed in 2017 and were paid in January and February 2018. At the end of 2018, the company had $12,000 in refund claims for sales in 2018 for which payment had been approved. These claims were paid in January 2018. Also in January 2019, the company received an additional $30,000 in claims for sales in 2018. This $30,000 was paid by Gray in February 2019. With respect to the above, Gray can deduct:
A) $350,000 in 2018.
B) $362,000 in 2018.
C) $392,000 in 2017.
D) $442,000 in 2018.
E) None of the above.

Question

Quizplus · Accepted Answer

Gray can deduct $362,000 in 2018.

The refund for 2018 sales is $350,000 and it can be deducted in 2018 as it was paid in the same year.

The refund for 2017 sales is $50,000 and it is a prior period item. However, since all of these refund claims were filed and paid in January and February 2018, they are considered to be for 2018 tax year. Therefore, the $50,000 can also be deducted in 2018.

The $12,000 in refund claims for sales in 2018, which were approved at the end of 2018 and paid in January 2019, can be deducted in 2019.

The $30,000 in refund claims for sales in 2018, which were paid in February 2019, can also be deducted in 2019.

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