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31/12/2020 31/12/2019 Allowance for doubtful debt £700 £750 Bad debt expense £20 £40 Income before taxes...

31/12/2020

31/12/2019

Allowance for doubtful debt

£700

£750

Bad debt expense

£20

£40

Income before taxes

£1,300

£1,500

Retained Earnings

£5,000

£3,800

Jeremy Inc. uses an allowance method. Suppose the company had used the specific write-off method instead under which the company would wait for actual default to occur to record bad debt expense, what would the company have reported for Income before Taxes for the fiscal year ended December 31st, 2020?

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Answer #1

Allowance Method:

This method requires the companies to record losses which will occur in future as aniticpated losses to be recorded in financial statements.

In simple words, it is an estimation of how much sales amount will be non-collectible by the company during that year.

Since, company doesnt know what amoint will be collectible and which will be not it creates an allowance account for bad debts as a liability or rather provisions.

Bad debts allowance in income tax:

As per federal law, only those amounts which have actually become bad during that tax year shall be allowed as deduction.

No allowances or reserves or provisions is a deductible expense while arriving at the Taxable income of the year.

Conclusion:

Following shows the calculation:

Computation of Taxable Income as on 31.12.2020 Particulars Amount in Pound Income before taxes 1300 add Allowance for bad deb

Since income taxes follows bad debts written off a deduction of 20 would have been given as bad debts for the fiscal year 2020.

It has been assumed that the income before taxes of 1300 includes 700 and 20 as well , hence a reverse calculation has been applied by adding back these amounts to 1300 and then subtracting 20 as actual bad debts written off for the year.

The total income to be reported to Income tax in 2020 shall be 2000.

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