Question

On June 2, 2016, Harold's TV Sales sold Richard a large HD TV, on account, for $12,000. Harold's TV Sales uses the accrual method. In 2017, when the balance on the account was $8,000, Richard filed for bankruptcy. Harold was notified that he could expect to receive 60 cents on the dollar of the amount owed to him. In 2018, final settlement was made and Harold received $5,000. How much bad debt loss can Harold deduct and in which year(s)?

a. 2016—$0; 2017—$8,000
b. 2016—$0; 2017—$3,200; 2018—$0
c. 2017—$4,800
d. 2016—$12,000
e. None of these choices are correct.

Answer 1

Harold can deduct c. $4,800 as bad debt loss in the year 2017.

Step-by-step explanation:

The bad debt loss that Harold can deduct depends on the year in which the debt became partially uncollectible.

According to the information provided, Harold sold the TV to Richard on account in 2016 and received a portion of the payment in 2018.

Since Harold uses the accrual method, the deduction for bad debt loss can be taken in the year in which the debt became partially or completely uncollectible.

In this case, the amount owed to Harold by Richard became partially uncollectible in 2017 when Richard filed for bankruptcy.

Harold was then notified that he could expect to receive 60 cents on the dollar. Therefore, Harold can deduct c.$4,800 as bad debt loss in the year 2017.