Red Corporation incurred a $15,000 bad debt last year. Red Corporation also had an $9,000 long-term capital gain last year. Red's taxable income for last year was $100,000. During the current year, Red Corporation, unexpectedly, collected $7,000 on the debt. How should Red Corporation account for the $7,000 collection?

Question

Quizplus · Accepted Answer

The $7,000 collection should be recognized as income in the current year because it was previously written off as a bad debt, reducing taxable income in the prior year.

Red Corporation Incurred a $15,000 Bad Debt Last Year