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In october 2011 the company sold a 6-month service contract

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Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effects of each of the following transactions on the company's 2011 gross income assuming that the company uses any available options to defer its taxes.

a) In December 2010, the company received a $1,200 advance payment from a customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manufacturer until January 2011, and Drake immediately delivered it to the customer. The sale was reported in 2011 for financial accounting purposes.

b) In October 2011, the company sold a 6-month service contract for $240. The company also sold a 36-month service contract for $1,260 in July 2011.

c) On December 31, 2011, the company sold an appliance for $1,200. The company received $500 cash and a note from the customer for $700 and $260 interest, to be paid at the rate of $40 a month for 24 months. Because of the customer's poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750.

Reference no: EM13596366

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