For Its Financial Accounting Records Addison Company Uses the Allowance

question 68

Multiple Choice

For its financial accounting records Addison Company uses the allowance method to account for bad debts and estimates the balance in the "Allowance for Bad Debts" account using the aging method. For tax purposes, the allowance method cannot be used. The rationale for not allowing this method is

• A)The arm's length transaction concept has not been met.
• B)The all-events test has not been met.
• C)The Business Purpose Concept has not been met.
• D)Lack of constructive payment.

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Definitions:

Constructive Receipt

A tax principle that taxes income individuals have earned but not yet received, based on the availability without substantial restriction.

Control

Refers to the power to influence or direct people's behavior or the course of events.

Interest Income

Income earned from the lending of money or from depositing funds in interest-bearing accounts.

Banks

Financial institutions licensed to receive deposits and provide financial services, including loans, to individuals and businesses.