Please respond to one of the following topics: TOPIC 1: The Brown Company sells

Question

Please respond to one of the following topics:

TOPIC 1: The Brown Company sells small office equipment and fixtures on credit.  Their ending balance in Accounts Receivable for 2014 was $120,000.  It was expected that $5,000 of this balance would later prove to be uncollectible, so Brown set up an Allowance for Doubtful Accounts for $5,000, and declared $5,000 as Bad Debts Expense for 2014.  In June of 2015, Brown determined that a $1,285 receivable owed by Molly Quinn should be written off.  Discuss the impact that this June write off action will have on Brown's Net Income for 2014 and 2015, and explain your answer.

TOPIC 2: What is the difference between an account receivable and a note receivable? Give an example of each.

Explanation / Answer

So there will be no impact for the year 2014, However in year 2015 net income co will get a deduction for the amount written off as actual bad debt.

Supporting text was been given under :

Bad Debt Deduction

If someone owes you money that you cannot collect, you may have a bad debt. Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you are a cash method taxpayer (most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items.

There are two kinds of bad debts – business and nonbusiness.

Business Bad Debts - Generally, a business bad debt is a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless. You can deduct it on Profit or Loss from Business or on your applicable business income tax return.

The following are examples of business bad debts (if previously included in income):

Nonbusiness Bad Debts - All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.

A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine that it is worthless.

A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

Notes Receivable

In accounting language the company extending credit against a note receivable is called payee of the note and would account for this amount as note receivable whereas the client who needs to pay against that note is called maker of the note. The maker accounts for amount as note payable. Notes receivable carry interest charges, the face or recorded value of note is the primary sum of credit offered.

Accounts Receivable

When a company sells goods or provides services bills the buyer of goods or services later, we call it as an account receivable. For instance, a company may hire lawn mowing services from a provider, who provides the required services on the 1st of the month but bills the buyer of services on the 20th of that month, much after the services were provided. The company which provided services accounts for the amount as account receivable in the general ledger whereas the buyer or the company which availed of the services accounts for the amount as an account payable.

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