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

question 87

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:

Total Cost

The complete cost of producing goods or services, including fixed and variable costs, which is used to determine profitability and pricing.

Unit Cost

The expenses associated with manufacturing, warehousing, and distributing a single unit of a product or service.

Payroll Taxes

Charges applied to employers or their workers, typically measured as a fraction of the earnings paid by companies to their employees.

Direct Labor

The labor costs of workers who are directly involved in the production of goods or the rendering of services.