ACC 442 Lecture Notes - Lecture 7: Ordinary Income, Casualty Loss, Accrual
T/F: Pat hired Ella to do his company's taxes. Ella performs the services and bills Pat $8000. Pat has not
paid his bill, his business no longer exists and his whereabouts are unknown.
If ELLA is an accrual basis TP, she includes the $8000 in her income when services are performed but
cannot take the deduction for bad debt expense.
False; yes she includes the 8000 when services are performed but she can deduct as bad debt expense
T/F: Pat hired Ella to do his company's taxes. Ella performs the services and bills Pat $8000. Pat has not
paid his bill, his business no longer exists and his whereabouts are unknown.
If ELLA is a cash basis TP, she does not include the 8000 in income but she can take the bad debt
deduction.
False (she does not include the 8000 in her income but she cannot take the bad debt deduction because
it was never even recognized as income)
T/F: James is in the business of debt collection. He purchased a $20,000 account receivable from Green
Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account.
James can take a $2,000 bad debt deduction in the current year.
False; (his basis is only 15,000 therefore he made income of 2000)
T/F: If a business debt previously deducted as partially worthless becomes totally worthless this year,
only the amount not previously deducted can be deducted this year.
True
T/F: Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term
capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current
year, $8,000 needs to be included in gross income.
False; The taxpayer must include the $10,000 in gross income to the extent of the tax benefit received
last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset by the short-term capital
gain and $2,000 offset against ordinary income.
T/F: In 2015, Patridge company lent $1000 to Kay, who agreed to repay the loan in two years. In 2017,
Kay disappeared after the note became delinquent. If reasonable investigation by Patridge indicates that
Kay cannot be found or that the debt will not be collectable, Partridge can deduct the $1000 in 2017.
True (for a business debt, TP must have proof that debt is partially worthless and the amt of
worthlessness)
find more resources at oneclass.com
find more resources at oneclass.com
What is the specific charge-off method when accounting for bad debts?
Can only deduct bizz debts if they are partially/wholly worthless or non bizz debts if they are wholly
worthless.
For business debts, remember that you must have proof that they are partially worthless, and the
amount of their worthlessness.
Business bad debts are deducted as ordinary losses while non business bad debts are deducted as.....
__________________
short-term capital losses.
T/F: A cash basis taxpayer must include as income the proceeds from the sale of an account receivable
to a collection agency.
True
T/F: If an account receivable written off during a prior year is subsequently collected during the current
year, the amount collected must be included in the gross income of the current year to the extent it
created a tax benefit in the prior year.
True
T/F: A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
False; can only be taken in the year it becomes worthless!!!
T/F: A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was
created or when it became worthless.
False
T/F: In determining whether a debt is a business or nonbusiness bad debt, the debtor's use of the
borrowed funds is important.
False; the use of the funds is not important. the determination is made at the creditor level.
T/F: A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.
find more resources at oneclass.com
find more resources at oneclass.com
False; Corps and partnerships cannot claim nonbusiness bad debt deduction, they would be under
business.
T/F: A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.
True
T/F: A bona fide debt cannot arise on a loan between father and son.
False; a bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable
obligation to pay a fixed sum of money regardless of the relationship of the parties.
Robyn loaned her friend Jamil $25k to start a business, which later failed. When Jamil died after having
made principal payments on the loan, he was insolvent. Is this a business or nonbusiness bad debt?
Non business because it was Jamil's business not Robyn's and Robyn is not in the business of lending
money
T/F: The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial
worthlessness is determined.
False; TP is entitled to deduct the net loss only upon final settlement of the debt
T/F: A bond held by an investor that is uncollectible will be treated as a worthless security and hence,
produce a capital loss.
True
T/F: A loss from a worthless security is always treated as a short-term capital loss.
False; The last day treatment increases the likelihood that the capital loss will be classified as long term,
but is not automatic. So the capital loss could be either short term or long term.
T/F: A loss is not allowed for a security that declines in value.
True; a loss is allowed for a security that has become completely worthless during the tax year
For a loss to be sustained on small bizz stock (S1244 ) where does the loss have to have come from?
sale of stock or from stock becoming worthless
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
If ella is an accrual basis tp, she includes the in her income when services are performed but cannot take the deduction for bad debt expense. False; yes she includes the 8000 when services are performed but she can deduct as bad debt expense. T/f: pat hired ella to do his company"s taxes. Ella performs the services and bills pat . Pat has not paid his bill, his business no longer exists and his whereabouts are unknown. If ella is a cash basis tp, she does not include the 8000 in income but she can take the bad debt deduction. False (she does not include the 8000 in her income but she cannot take the bad debt deduction because it was never even recognized as income) T/f: james is in the business of debt collection. He purchased a ,000 account receivable from green. During the year, james collected ,000 in final settlement of the account.
