Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. $$\begin{array} { l l }
\text { Begirruing allowarce for bad debts } & \$ 950,000 \
\text { Actual write-offs of accourts receivable during the year } & ( 899,600 ) \
\text { Addition to allowarce } & \$ 845,000 \
\text { Erding allowarce for bad debts } & \$ \underline { 895,400 }
\end{array}$$ Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

Question

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. $$\begin{array} { l l } 
\text { Begirruing allowarce for bad debts } & \$ 950,000 \
\text { Actual write-offs of accourts receivable during the year } & ( 899,600 ) \
\text { Addition to allowarce } & \$ 845,000 \
\text { Erding allowarce for bad debts } & \$ \underline { 895,400 }
\end{array}$$ Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

Quizplus · Accepted Answer

The addition to the allowance for bad debts of $845,000 is higher than the actual write-offs of $899,600, resulting in a net increase of $54,400 in the allowance for bad debts. Since the accrual method is used, this increase is recognized as an expense and reduces book income. However, for tax purposes, bad debt expense is not recognized until the related accounts receivable are actually written off. Therefore, this results in a temporary excess of book income over taxable income of $54,400.

Earl Company Uses the Accrual Method of Accounting Because of the Difference Between the GAAP Rules and the a Reconciliation