The Taxpayer Has Consistently, but Incorrectly, Used an Allowance for Bad

question 4

Multiple Choice

The taxpayer has consistently, but incorrectly, used an allowance for bad debts. At the beginning of the year, the balance in the allowance account is $90,000.

• A) If the IRS examines the taxpayer's return and requires the taxpayer to change accounting methods, the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one- half in the following year) as the adjustment due to the change in accounting methods.
• B) If the taxpayer voluntarily changes methods, the $90,000 adjustment can be spread over the current and three following years.
• C) If the taxpayer voluntarily changes methods, the $90,000 reserve can be used to absorb bad debts until the account balance is zero.
• D) If the IRS examines the taxpayer's return, no adjustment to the reserve account will be required if the balance
• Is consistent with prior bad debt experience.
• E) None of the above.

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Definitions:

Behavior

The actions or reactions of an organism, often in response to the environment, which can be observed and measured.

Analysis

The process of examining and breaking down complex information or data into smaller parts to gain a better understanding of it.

Structuralism

An early school of psychology that sought to analyze the adult mind in terms of the simplest definable components and then to find the way in which these components fit together in complex forms.

Basic Elements

Fundamental components or aspects that make up a system, structure, or principle.