Accounting and Taxation

In: Business and Management

Submitted By amarspider
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Pages 241
CHAPTER 7: DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES 1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $2,000 bad debt deduction in the current year. a. True b. False

RATIONALE: James has a basis of $15,000 in the account receivable and hence, he has income of $2,000.

2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year. c. True d. False


3. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income. e. True f. False

ANSWER: False RATIONALE: The taxpayer must include the $10,000 in gross income to the extent of the tax benefit received last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset by the short-term capital gain and $2,000 offset against ordinary income.

4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency. g. True h. False


5. If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year. i. True j. False


6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.…...

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