Molton Inc., which operates a chain of retail toy stores, prepares GAAP based financial statements. Molton must use the allowance method to account for business bad debts for both book and tax purposes.

Question

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For book purposes, GAAP requires the use of the allowance method for accounting for bad debts, which involves estimating uncollectible accounts. However, for tax purposes, the IRS generally requires the specific charge-off method, where bad debts are only recognized when they are actually deemed uncollectible, not estimated in advance.