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:

Causal Relationship

A connection between two variables where a change in one directly causes a change in the other.

Positive Correlations

A statistical relationship indicating that as one variable increases, the other variable tends to increase as well.

Dental Health

The overall health and hygiene of the mouth, including teeth, gums, and the prevention of dental diseases.

Positively Correlated

A relationship between two variables where they move in the same direction, meaning as one variable increases, the other also increases.