Question

Copper Corporation incurred a $12,000 bad debt last year. 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:

a. $4,000 income.
b. $0 income.
c. $3,000 income.
d. $5,000 income.
e. None of these choices are correct.

Answer 1

Copper Corporation should account for the unexpected collection of $5,000 on a previously written-off debt as $5,000 income, because the debt was already deducted from their taxable income in the prior year.

Step-by-step explanation:

When Copper Corporation unexpectedly collected $5,000 on a previously written-off debt, the correct way to account for this collection would depend on their method of accounting for bad debts.

However, under the assumption that they initially wrote off the entire $12,000 as a bad debt expense, and given no other changes in their tax position, the entire $5,000 collection would typically be recognized as income.

This is because the debt was already deducted from their taxable income in the prior year, hence any recovery would be included in their current income. Therefore, the correct answer would be d. $5,000 income.