Question

Hudson Company recently recorded an allowance for doubtful accounts of 4% of the current year sales. By doing so, Hudson created ______ book-tax difference.

a. positive.
b. negative.
c. zero.
d. deferred.

Answer 1

Hudson Company created a positive book-tax difference by recording an allowance for doubtful accounts of 4% of the current year sales.

Step-by-step explanation:

Hudson Company recently recorded an allowance for doubtful accounts of 4% of the current year sales. This means that Hudson set aside a portion of their sales as an estimated amount that may not be collected in the future. By creating this allowance, Hudson is recognizing a potential loss in their financial statements. This creates a book-tax difference because the amount recorded for tax purposes may be different than what is recorded in the books.

In this case, since Hudson recorded the allowance for doubtful accounts, it means they are estimating a potential loss in their sales revenue. This will result in a positive book-tax difference because the amount recorded for tax purposes will be lower than what is recorded in the books.