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Uncollectible Accounts and Tax Consequences for Business

What are options for recording uncollectible accounts for financial statement purposes? Which is (are) most generally used? What about for tax purposes - how must they be addressed for purposes of income tax reporting?

Why is the tax expense reported on the income statement comprised of current and deferred tax?

How are deferred tax assets and deferred tax liabilities derived?

Solution Preview

There are two popular methods for recording uncollectible accounts for financial statement purposes and they are the Percentage of sales method and the percentage of outstanding receivables method. In the Percentage of sales method the accountant estimates the amount of uncollectible accounts as a percentage of sales. The amount is then debited as Bad debt expense and credited to allowance for uncollectible accounts. In the percentage of receivables method there is a choice between a simple percentage versus aging the receivables and assigning a percentage to each category of dating 0- 30, 31-60,61-90, over 90. After the amount that is determined to be ...

Solution Summary

This solution discusses the options for reporting uncollectible accounts and the effects on deferred versus current taxes.