Question

Sally is in the business of purchasing accounts receivable. Last year, Sally purchased an account receivable with a face value of $80,000 for $60,000. During the current year, Sally settled the account, receiving $65,000. Determine the maximum amount of the bad debt deduction for Sally for the current year. If an amount is zero, enter "0".
Sally's basis in the account receivable is $ .

She has a bad debt deduction of $ .

Answer 1

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