Question

1.When Steve died, his wife Linda was the sole beneficiary of his $50,000 life insurance policy. How will the $50,000 life insurance proceeds affect Linda’s gross income?

2.For tax purposes in 2018, A&P had operating income of $375,000 and operating expenses of $128,000. Included in A&P’s expenses is $22,000 for bad debts write-offs during 2018. In January of 2019, they received $7,000 from an account that was written off as a bad debt in 2018. What effect does this collection have on A&P’s 2019 taxable income? Can you tell whether A&P is a cash-basis or accrual basis taxpayer, and explain why?

Answer 1

Ans-1

Insurcance amount received by Linda is not liable to tax and not to be reported.

Ans-2

Here A&P will have to report the recovered amount earlier written off to the extent of $ 7000 in 2019.Note that the reporting has to be limited to the amount of recovery.

since A&P had claimed Bad Debts in earlier year this indicates that it follows accrual system since Cash basis tax payers are cannot claim Bad debt as a deduction.