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:

Real Exchange Rate

The speed at which an individual is able to convert the money of one nation into that of another, taking inflation into account.

Nominal Exchange Rate

The speed at which the currency of one nation can be traded for the currency of another nation, without correction for inflation.

Trade Balance

Trade balance is the difference between the value of a country's exports and imports over a certain period, indicating the relative strength of its international trade.

Investment

The allocation of resources, often financial, into endeavors with the expectation of generating future returns.