Question

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year.

Beginning allowance for bad debts	1,100,000
Actual write-offs of accounts receivable during the year	(700,000)
Addition to allowance	900,000
Ending allowance for bad debts	$1,300,000

Which of the following statements is true?

Select one:

a. Bad debt expense per books is $1,300,000, and the income tax deduction for bad debts is $900,000.

b. Bad debt expense per books is $700,000, and the income tax deduction for bad debts is $900.000.

c. Bad debt expense per books and the deduction for bad debts is $700,000.

d. Bad debt expense per books is $900,000 and the income tax deduction for bad debts is $700,000.

Answer 1

The correct answer is

D) Bad debt expense per book is $ 900000 and the income tax deduction for bad debt is $ 700000

Explanation

Addition to allowance means the bad debt expense the company has recognized in the books of account during the period but the company has written off only $ 700000 of receivable which will be allowed as deduction under income tax as only actual accountreceivable written off is only allowed in income tax.

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