Question

Copper Corporation billed its customer $24,000 but was only paid $12,000. After deeming the remainder to be worthless, it was written off as a business bad debt. Copper Corporation also had an $8,000 long-term capital gain last year. Copper's taxable income for last year was $28,000. During the current year, Copper Corporation unexpectedly collected $5,000 on the debt. Copper Corporation should account for the $5,000 collection as:______

Answer 1

Copper Corporation should record the unexpected $5,000 collected on the previously written-off debt as income for the current year, contributing to its taxable income.

Step-by-step explanation:

The Copper Corporation should account for the unexpected $5,000 collection on the previously written-off debt as income in the current year.

Since the debt was deemed worthless in a prior year and written off as a business bad debt, this recovery will be included in the corporation's gross income. However, if the amount recovered is less than or equal to the amount previously written off, it should only be included in income to the extent that a tax benefit was received from the write-off.

In Copper Corporation's case, the $12,000 that was not paid previously was written off, and now that $5,000 has been unexpectedly received, the $5,000 would be included as part of the company's taxable income for the current year.