Question

Question 1

Under GAAP, a corporation that recognizes bad debt expense for accounts receivable using the allowance method. These estimated receivables that cannot yet be written off for tax purposes result in a deferred tax asset.

a. True or false? Explain.

b. If these debts actually become worthless, what is the reversing effect?

Question 2

Read IRC §448(a) and (c)(1) and IRC §471(c). The $25 million has been adjusted for inflation to $26 million.

In your own words, consulting your text, explain these provisions.   Limit your answer to 100 words.

You can find the Code sections at Cornell Law School LII using any search engine.

Question 3

Phyllis Corporation has gross income and deductions as follows:

2020 2021 2022

Gross income 400,000 500,000 600,000

Deductions 750,000 400,000 300,000

How much is the corporations gross tax for each year 2020 – 2022. Recall that the corporate tax rate is 21%.

Answer 1

Answer 1 (a) True as in Income Tax Act Bad debts is allowed as per ICDS (Income Computation and Disclosure Standard). In accounting bad debt is enter but income tax alowed them when they are permanently bad debt.

Answer 1 (b) When bad debt are permanent then it will be allowed to the amount disallowed earlier and DTA created will be adjusted.

Answer 3 Corporate tax will be:

Particulars 2020 2021 2022 Gross income 400000 500000 600000 Deduction 750000 400000 300000 Taxable income/Loss -350000 100000 300000 Carry forward losses 0 100000 -250000 Taxable income/Loss -350000 0 50000 after adjustment Tax @21% 0 0 10500 Loss Carry Forward - 350000 - 250000 0

Under ncome tax Act Carry forward of losses is allowed only for 8 Assessment Years.