13. George is employed by the Quality Appliance Company. All the full time emplo

Question

13. George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the company's cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $500. The company's normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of S150. During the year George was required to have his refrigerator serviced once. The cost of the call would have been $75 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator, the receipt of the service contract, and the service call?

Explanation / Answer

ANSWER: George will likely be needed to recognize $120 income from the service contract. When at a discount of 20% the company sells the service contract to it's employee then the employee is not required to recognize income. Since George received a 100% discount; thus, $120 (=80% * $150) should be included in the gross income. But George can provide a reasonable argument that merely receiving a no- additional-cost service, and hence would not be categorised to recognize income. Moreover because George paid more than the employer’s cost thus will not be required to recognize income from the bargain purchase of the refrigerator

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