Question

Taj operates a sole proprietorship, maintaining the business records under the cash-basis method of accounting. Taj performs services for a client and sends the client a bill for $12,000. Six months later, before payment is received by Taj, the client files bankruptcy, with no assets available for unsecured creditors such as Taj. Taj will deduct A) $12,000 ordinary loss. B) $3,000 long-term capital loss. C) $3,000 short-term capital loss. D) $0.

Answer 1

Answer:

Option D. $0

Explanation:

The reason is that Taj will have to recognize a bad debt expense of $12,000 which would decrease the receivable with the same amount.

The entry would be:

Dr Bad Debt Expense $12,000

Cr Accounts Receivables    $12,000

This means that the Taj will not reconize loss, all he will do is pass a bad debt expense entry. So the correct answer is option D.