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U.S. GAAP requires companies to record estimated Bad Debt Expense (and the relat

ID: 2416576 • Letter: U

Question

U.S. GAAP requires companies to record estimated Bad Debt Expense (and the related Allowance for Uncollectible Accounts) in the year that sales are made on account. U.S. Tax Law, however, does not allow a company to take a tax deduction until the uncollectible account is written off. What are the deferred tax consequences of this difference?

Select one:

a. This difference between GAAP and tax law represents a permanent difference that creates neither a future taxable amount nor a future deductible amount.

b. This difference between GAAP and tax law creates a future deductible amount that results in a deferred tax asset.

c. This difference between GAAP and tax law creates a future taxable amount that results in a deferred tax asset.

d. This difference between GAAP and tax law creates a future deductible amount that results in a deferred tax liability.

e. This difference between GAAP and tax law creates a future taxable amount that results in a deferred tax liability.

Explanation / Answer

As bad debt expense is not allowed as deduction untill these are actually writte off, the action generates a future possible tax deductible amount becuase in future when the bad debt is written off it will be allowable deduction and this will result in a Deferred tax asset.

So Option b. This difference between GAAP and tax law creates a future deductible amount that results in a deferred tax asset-- is the correct option.