Part -1:
CASE:
- Taxpayer is a securities firm which uses the accrual method of accounting. Taxpayer executes stock trades and performs settlement functions. Settlement functions include recording the sale and confirming it with the customer. Trades made on December 28, 20X5, until the end of the month are not settled until January of 20X6. Taxpayer made $1,000,000 of net commissions from these trades in late December. Since the security is not credited to the customer's account until settlement date, taxpayer wants to declare the income on the settlement dates in 20X6. Taxpayer does not receive the money until January 20X6. Advise the taxpayer.
Issue
- Whether an accrual basis securities firm has gross income under sec. 451(a) on the trading date or the next year on the settlement date when all the work is performed, payment is due, and money received?
Your assignment is just conclusion and analysis:
- Is the "all-events test" for an accrual basis taxpayer met?
- In analysis, cite
Section 61(a)(1)
Section 451(a)
Reg 1.451-1(a)
Charles Schwab vs. Commissioner 107 TC 282 (1996)
If you can find a revenue ruling on this, also cited it. Please state the facts as well.
Part -2:
FA Case 1:
Facts
Runway Discount is a privately held online retailer that implemented a referral marketing campaign where they offer existing customers a $25 Referral Credit towards a future purchase if they refer a friend to the Runway website and the new customer purchases merchandise from them. After the new customer makes a purchase, the existing customer receives the $25 Referral Credit towards a future purchase. The $25 Referral Credit represents the fair value of the cost Runway would pay to acquire a new customer from an unrelated third party or marketing firm.
Issues (they should be framed as yes or no questions for your paper)
1. Should the $25 Referral Credit be recorded in Runway's Income Statement as a reduction of revenue or as a marketing expense?
2. When does Runway record the $25 Referral Credit?
3. How will Runway record the $25 Referral Credit when it is earned by the existing customer and when it is redeemed?
ASC 605-50 for FASB codification
You should also have at least one reference to the SEC staff accounting bulleting and the FASB concept statements.
The final paper should also have a section on financial statement presentation and disclosure impact, Including journal entries. See page 109 of the text.
2 pages each