Question
Merrill Lynch is a large securities firm which uses the accrual method of accounting in accordance with Generally Accepted Accounting Principles. Merrill Lynch executes stock
Merrill Lynch is a large securities firm which uses the accrual method of accounting in accordance with Generally Accepted Accounting Principles. Merrill Lynch executes stock trades and performs settlement functions. Settlement functions include recording the sale and confirming it with the customer. Trades made on December 28, 2017, until the end of the month are not settled until mid-January of 2018. Merrill Lynch netted $100,000,000 of sales commissions from these trades in late December 2017. Since the security is not credited to the customers account until settlement date, Merrill Lynch wants to report the Revenue on their 2017 Income Statement but wants to declare the income on the tax return for 2018 because it coincides with the settlement dates in 2018. Taxpayer does not receive the money until January 2018. Draft a written memo to the client addressing the following research issues: Merrill Lynch contacts you for guidance on this issue. Should the revenue be reported in 2017 or 2018 for financial statement reporting purposes? Why? Please site the specific guidance you followed in response to your research question. The primary issue you should research is 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?
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