Question

hello i am stuck on the line about bad debt

C CORPORATION BOOK-TO-TAX RECONCILIATION. Western Corporation, an accrual basis, calendar-year C corporation, began operations on January 2, 2000. For each item below, determine the 2010 Schedule M-1 adjustment to reconcile book income to taxable income, i.e., the amount and the effect ( + or -). Net income per books $1,000,000 Provision for Federal income taxes, $320,000 Municipal bond interest, $20,000 During 2010, Western increased its allowance for uncollectible accounts by $25,000; actual bad debts written off in 2010 were $32,000. Western reported depreciation for financial purposes of $90,000; MACRS for the year was $129,000 Western acquired another corporation in 2007, paying $600,000 for goodwill. Western recorded a goodwill impairment loss of $30,000 for financial purposes in 2010. In December 2009, Western received $35,000 as an advance payment for an order from a customer. Western reported the $35,000 as a liability (unearned income) on its balance sheet at 12/31/09 and as earned income in 2010. In December 2010, Western received $30,000 as an advance payment for an order from a customer. Western reported the $30,000 as a liability (unearned income) on its balance sheet at 12/31/10. Western reported gains of $30,000 and losses of $38,000 from the sale of investments in its "Other Revenues & Expenses" section of its income statement. Western deducted a $10,000 excess charitable contribution carryover from 2009 on its 2010 tax return. Western received dividend income from a 25%-owned corporation totaling $60,000. Western reported $25,000 as its U.S. production activities deduction on its 2010 income tax return. In May 2010, Western paid a $10,000 fine to a local government for violating a local ordinance. Taxable Income

Answer 1

Hello,

Bad debts is allowed as deduction to taxable income only when it actually occurs.

The company increases the reserve by $25,000 which means the book profit is already reduced by this amount. Hence this needs to be added back (+) to arrive at the taxable income. The actual bad debts written off is $32,000, which can be allowed as a tax deduction. This will be deducted (-) to arrive at the taxable income.

Hope this helps. I just answered the bad debts line as you specifically mentioned. Please let me know if you need help with any other item.

Thank you and have a great day!

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