Question

1. On June 2, 2016, Fred’s TV Sales sold Mark a large HD TV, on account, for $12,000. Fred’s TV Sales uses the accrual method. In 2017, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive more than $4,000 on the debt, and he immediately wrote off $4,000 for book purposes. In 2018, final settlement was made and Fred received only $1,000. What is the maximum amount of bad debt loss that Fred can deduct in 2017?

a. $3,000 b. $7,000 c. $8,000 d. $4,000 e. $8,000, but he must then include $1,000 in income in 2018.

2. Norm’s car, which he uses 100% for personal purposes, was damaged in an accident in 2017. The car’s adjusted basis at the time of the accident was $13,000. Its fair market value before the accident was $10,000 and after the accident was $2,000. Repair of the car would have cost $15,000, so his insurance policy paid him the $10,000 fair market value of the car before the accident, minus a $500 deductible. His adjusted gross income was $14,000 (before considering the loss) and he itemizes deductions. What is Norm’s deductible loss?

a. $0 b. $500 c. $2,000 d. $8,600 e. $9,500

3. Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. Peggy is an accrual basis taxpayer and accrued interest of $600 on the account last year. This year, before making any payments on the account, the debtor filed for bankruptcy and the account was settled for $20,000. How much loss can Peggy deduct and in which year?

a. $600 for this year. b. $600 for last year and $5,000 for this year. c. $5,000 for this year. d. $5,600 for this year. e. $10,000 for this year.

4. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As partial payment for the car, the dealer accepted the note Sharon had received from her sister. At the time Sharon purchased the car, the note had a balance of $18,000 (including accrued interest), but Hank’s Auto gave her credit for only $17,000, which it included in the sales price in reporting its income for the year. During the current year, Sharon’s sister died. Hank’s Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance of $15,500 (including accrued interest that Hank’s Auto had not included in income). What is the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return?

a. $14,000 b. $14,500 c. $15,500 d. $18,000 e. None of the above

5. Which of the following events would produce a deductible loss in 2019?

a. Damage to a personal residence caused by a car whose brakes had failed. b. Termite infestation of a personal residence over a several year period. c. Damages to personal automobile resulting from the taxpayer’s willful negligence. d. A misplaced diamond ring. e. None of the above.

Answer 1

Dear student,

As per the HOMEWORKLIB POLICY, only the first four questions should be answered. Kindly take note of it.

Part 1

Option C

C) 8000

In the given case, it is referred to as a business debt and therefore it is possible to recognize partial worthlessness in 2017. The maximum amount of bad debt loss that Fred can deduct in 2017 is $8000.

Part 2

Option A

A) $0

Amount (lesser of adjusted basis or FMV decline)	10000
Less: Insurance recovery as if the claim had been filed	(8000)
Statutory floor	(100)
AGI limitation (10% *$14,000)	(1400)
Deductible loss	500

As insurance claim was not filled on time, no deduction is permitted.

Part 3

Option B

B). b. $600 for last year and $5,000 for this year.

(30000-25000 = 5000)

Part 4

Option C

C) $15500

the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return is equal to the note balance At the time of the notification = $15500