At the end of October, year 1, Dunbar Corporation hired Specialty Training, an accrual-basis, calendar-year taxpayer, to provide a six-week training program for its employees. Dunbar paid Specialty its full training fee of $30,000 on the first day of training. After five weeks of training sessions, Dunbar cancelled the last week of training and demanded a refund of $5,000 because its employees felt the training was misrepresented and failed to provide the in-depth coverage of the topics they had specified. In January, year 2, Specialty refunded $5,000 to Dunbar. Specialty's marginal tax rate for year 1 is 34 percent.
a. What choices does Specialty Training have to account for the $5,000 refund?
b. If Specialty's marginal tax rate in year 2 is 39 percent, how should the company account for the refund for tax purposes?
c. If Specialty's marginal tax rate in year 2 is 25 percent, how should the company account for the refund for tax purposes?