Answer:
Sally’s basis in the Account Receivable is $60,000
She has a bad debt deduction of $0. There is no Bad debt deduction for Sally. Rather she made a profit on the transaction.
Explanation:
The Account Receivable can be defined as a Debt Instruments. Debt instruments in accounting are valued at Lower of Cost or Net Realizable Value.
Cost is the amount of cash or its equivalent that was expended to obtain an asset. The cost of this Account Receivable therefore is 60,000
Net realizable value (NRV) is the value that can be realized from the sale of an asset. Net Realizable value of the Account Receivable therefore is 80,000.
Therefore the value to be utilized as the value of the Account Receivable 60,000.
Below is the accounting entries to record the transaction and recognized profit.
For the Face Value of the Debt
Debit: Account Receivable Account(Debtors) 60,000.00
Credit: Account Receivable Purchase Account 60,000.00
For the payment of the A/R
Debit: Account Receivable Purchase Account 60,000.00
Credit: Bank 60,000.00
For the settlement received on the A/R
Debit: Bank 65,000.00
Credit: Account Receivable Account(Debtors) 60,000.00
Credit: Profit & Loss 5,000.00
