Assignment Of Income (Chapter 4) Income Tax 20 Correctly Answered Questions Latest Update

Perry Refrigerators, an accrual-basis, calendar-year company for both tax and financial reporting, received a $600 payment from the sale of a $1,000 refrigerator in September of Year 1. The cost of the refrigerator to Perry was $550, and the refrigerator was in stock on December 31, Year 1. The refrigerator was shipped to the customer in March of Year 2 after the remaining $400 was paid. When is Perry required to report income from the sale of the refrigerator? A. $600 in Year 1 and $400 in Year 2. B. $550 in Year 1 and $450 in Year 2. C. $1,000 in Year 1. D. $1,000 in Year 2. {Ans: D. As a general rule, an accrual-basis taxpayer reports advance payments for the sale of merchandise when they are earned (e.g., when the goods are shipped). This rule applies only if such payments are reported for tax purposes no later than they are reported for financial accounting purposes. Even when this is true, Reg. 1.451-5(c)(1) limits the time of deferral if the taxpayer has received substantial advance payments (defined as greater than the seller's cost of goods sold) and the goods are on hand or available from normal channels.