Question

Petal, Inc. isan accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2016, the following occur associated with bad debts.

Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve -0-
Identifiable bad debts during 2016 12,000
The amount of the deduction for bad debt expense for Petal for 2016 is:"_________

Answer 1

The 2016 bad debt expense deduction for Petal, Inc. is $10,000, as it is the amount added to the reserve and avoids creating a negative reserve balance.

Step-by-step explanation:

The deduction for bad debt expense for Petal, Inc. for the year 2016 is calculated based on the changes in the reserve for bad debts. As an accrual basis taxpayer using the aging approach, Petal can take a deduction equal to the amount of actual bad debts identified during the year, unless it leads to the reserve being negative. In 2016, Petal identified $12,000 in bad debts and added $10,000 to the reserve but started with a zero balance in the reserve. Therefore, the bad debt expense deduction for the year would be the sum of the identifiable bad debts that do not exceed the year-end reserve balance, which is $10,000, the amount added to the reserve, since adding the $12,000 in bad debts would create a negative reserve balance.