Reference no: EM131821842

Question - The Yellow Appliance Company, an accrual basis taxpayer, sold goods in December 2005 for $10,000 under terms which allowed the customer to return the goods and receive a refund within 60 days of the sale. In January 2006, the customer complained that he was not satisfied with the product and Yellow refunded the customer $10,000. Yellow's taxable income in 2005 was $70,000, and in 2006 Yellow's taxable income was $25,000. The applicable tax rate schedule is 15 percent on the first $50,000 of income and 25 percent on income in excess of $50,000. What is the effect of the refund on Yellow's 2006 tax liability?