Question

Nancy, Inc. is an accrual basis taxpayer. Nancy uses the aging approach to calculate the reserve for bad debts. During 2020, the following occur associated with bad debts: Credit sales $300,000 Collections on credit sales 280,000 Amount added to the reserve 12,000 Beginning balance in the reserve –0– Actual identifiable bad debts during 2020 10,000 The amount of the deduction for bad debt expense for Nancy for 2020 is:

Answer 1

Answer: $12,000

Explanation:

First of all, ascertain total debtors as shown below:

                                                             $  

Credit Sales                                    300,000

Less Receipts                                 280,000

Total Debtors                                    20,000

Less provision for bad debt             12,000 (bad debt expense)

Debtors                                               8,000  (Balance sheet)

Since the amount added to bad debts reserve $12,000 is higher than actual bad debts $10,000 for the year, the amount added to reserve represents amount of bad debt posted to bad debt expense account.

The amount of the deduction of bad debt expense for Nancy for 2020 is $12,000.