In October 2016,Jonathon Remodeling Co. ,an accrual-method taxpayer,remodels and renovates an office building for Dale and bills him $30,000.Dale signs a note for the debt.Dale keeps delaying payment and files bankruptcy in 2017.Creditors are informed that no assets are available for payment.Jonathon Remodeling Co.will report
A)$0 income in both years.
B)$30,000 income in 2016 and a bad debt deduction of $30,000 in 2017.
C)$30,000 income in 2016 and a STCL of $30,000 in 2017 limited to $3,000 after netting.
D)$30,000 income in 2016 and then must amend last year's return to show $0 income when advised of the bankruptcy.

Question

Quizplus · Accepted Answer

Under the accrual method of accounting, income is recognized when earned, which in this case is when the remodeling and renovation services were completed in 2016. Since Dale's debt became uncollectible in 2017 due to his bankruptcy, Jonathon Remodeling Co. can claim a bad debt deduction in 2017 equal to the amount of income recognized in 2016, which is $30,000. Therefore, Jonathon Remodeling Co. will report $30,000 of income in 2016 and a bad debt deduction of $30,000 in 2017.