Deduction Limit for Doubtful Debts

B

The statement is true.

Under Generally Accepted Accounting Principles (GAAP), an allowance for doubtful accounts is created to estimate the amount of bad debts that may result from a company's credit sales. The allowance for doubtful accounts reduces the value of accounts receivable to their estimated net realizable value.

To determine the amount of the allowance for doubtful accounts, a company may use different methods, including the specific identification method and the percentage of sales method. The specific identification method involves identifying specific accounts that are doubtful and estimating the amount of bad debt associated with them. The percentage of sales method involves estimating bad debts as a percentage of sales.

According to GAAP, the deduction for bad debts must be based on the identification of specific doubtful amounts. The maximum amount that can be deducted is the amount of doubtful debts identified in the current year or the preceding year, whichever is higher, and 75% of the amount reported for statutory purposes. This means that a company cannot deduct more than the total amount of doubtful debts identified and cannot deduct more than 75% of the total amount of accounts receivable reported on the company's financial statements.

In summary, the statement is true because the deduction for bad debts must be based on identification of specific doubtful amounts, and it is limited to the maximum of doubtful debts identified in the year or a preceding year and 75% of the amount reported for statutory purposes.