For its financial accounting records Addison Company uses the allowance method to account for bad debts and estimates the balance in the "Allowance for Bad Debts" account using the aging method. For tax purposes, the allowance method cannot be used. The rationale for not allowing this method is
A)The arm's length transaction concept has not been met.
B)The all-events test has not been met.
C)The Business Purpose Concept has not been met.
D)Lack of constructive payment.

Question

Quizplus · Accepted Answer

The rationale for not allowing the allowance method for tax purposes is that it does not meet the all-events test. The all-events test requires that all events necessary to determine the fact of liability and the amount of liability occur before the liability can be recognized for tax purposes. With the allowance method, the amount of bad debt expense and corresponding allowance for bad debts are estimated, and it is not known which specific debts will not be collected until later. Therefore, the allowance method does not meet the all-events test for tax purposes.

For Its Financial Accounting Records Addison Company Uses the Allowance