Family Value Stores [FVS] is a large department store in a Melbourne. Sales are made on the following terms:
Cash;
Lay-by;
By what is called “take-now; pay-later”.

Required 1
Under the Lay-by sales conditions customers pay a non-refundable deposit of 10% and agree to pay off the balance within 12 months. The goods are taken from the store’s inventory and set aside at the time the deposit is made.

i)
Should FVS return on a cash or accrual basis? Cite relevant case law.
ii)
When is income derived in a lay-by sale?
iii)
What is the tax treatment of a) the deposit; and b) progress payments?
iv)
What is the tax treatment of the trading stock the subject of a lay-by?

Required 2
Under the ‘take now, pay later’ contract customers pay a 10% deposit and may take the goods on condition that a further 8% of the sale price is added to the balance owing which the customer then pays off in 12 equal monthly instalments. [See example] The contract notes that title passes to the customer at the time of sale and, if the customer defaults on any payment, the whole debt is immediately payable and recoverable.

Example: List price $3000; deposit $300; balance $3000 + (3000 x 8%) 240 – 300 = $2940/12 = $245 per month. [Total paid: $3,240]

For the year ended June 30 records show sales of $1,125,000:
Deposits received $112,500
8% interest charged 90,000
Progress payments received 700,000
Balance owing 515,000
(Cost of goods subject to contracts $690,000)

i)
Advise FVS what income is derived and when.
ii)
What tax consequences follow on default?