Question

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year:

a. The loans provide Wren Corporation with a business bad debt deduction.

b. The loans result in a nonbusiness bad debt deduction to Wren Corporation.

c. Wren Corporation is not permitted a deduction for the loans.

d. Wren claims a capital loss due to the uncollectible loans.

e. None of these choices are correct.

Answer 1

option A. The loans provide Wren Corporation with a business bad debt deduction.

Step-by-step explanation:

Bad Debt is an accounting term. it is used to denote a sad case where a borrower whose inability to pay back loan or funds borrowed from a creditor as a result of bankruptcy, mismanagement e.t.c. Bad Debt simply is cancellation (write-off) of an amount that is receivable in business.

Income taxation laws provides the avenue to granting a creditor to deduct any debt not repaid as a bad debt deduction, which will invariably reduce the taxable income.