Question

Nancy, Inc. is an accrual basis taxpayer. Nancy uses the aging approach to calculate the reserve for bad debts. During 2017, the following occur associated with bad debts:

Credit sales $300,000
Collections on credit sales 280,000
Amount added to the reserve 12,000
Beginning balance in the reserve -0-
Identifiable bad debts during 2017 10,000

The amount of the deduction for bad debt expense for Nancy for 2017 is:
1) $10,000
2) $22,000
3) $20,000
4) $12,000
5) None of these choices are correct

Answer 1

The deduction for bad debt expense for Nancy, Inc. for 2017 would be $10,000, as this represents the actual identifiable bad debts written off during the year.

Step-by-step explanation:

The question asks about the deduction for bad debt expense for Nancy, Inc. in 2017, an accrual basis taxpayer who uses the aging approach to calculate the reserve for bad debts. To determine the bad debt expense deduction, we must consider the beginning balance of the reserve, the amount added during the year, and the actual bad debts identified.

Since there was no beginning balance in the reserve (it was $0), and Nancy added $12,000 to the reserve during the year, while identifying $10,000 in actual bad debts, the deduction for bad debt expense Nancy can claim for tax purposes would be the amount of actual bad debts. Therefore, the correct answer is $10,000, which is the aggregate of identifiable bad debts written off during the year.