Question

In year 1, X Corp. had revenues on account from 10 customers, $10 each, totaling $100. X has no operating expenses. Based on past practice, we expect that one customer will not pay, but we do not know which customer will not pay. None of the customers paid yet?

Questions: (year 1)

1. What is taxable income if X is a cash-basis taxpayer?

2. What is taxable income if X is an accrual-basis taxpayer?

3. What is pre-tax income for financial accounting?

Continued: In year 2, all customers except for 1 paid up a total of $90. The customer that is delinquent declared bankruptcy and has no remaining assets.

1. What is taxable income for year 2 if X is a cash-basis taxpayer?

2. What is taxable income for year 2 if X is an accrual-basis taxpayer?

3. What is pre-tax income for year 2 for financial accounting?

Answer 1

Year I

1). $100/- taxable income (under Cash basis accounting you cant claim provision for Doubtful Debts)

2). $90/- taxable income & $10 Provision for bad debts (under accrual basis accounting you can claim provision for Doubtful debts)

3). $90/- taxable income & $10 Provision for bad debts.

Year II

1). $90/- taxable income (under cash basis accounting you can't claim provision for bad debts, but can deduct actual bad debts, in this year you received amount up to $90/- the remaining amount is bad debts, you can deduct it from taxable income)

2). $90/- taxable income (in Accrual basis accounting you can create provision for doubtful debts, but once your portion of due became bad debts, you can adjust it from the provision for doubtful debts)

3). $90/- taxable income & $10 provision for bad debts.