Claremont Enterprises, Inc. started operations in early 2015. During the first year of operations, Claremont generated sales of \($2.5\) million, and at year-end, had \($250,000\) in outstanding accounts receivable. Using collection estimates provided by its controller, the company estimated that its bad debt expense for 2015 would be \($8,925\).

During its second year of operations, Claremont generated sales of \($4.2\) million, and at year-end, had \($750,000\) in outstanding accounts receivable. Using an aging schedule, the controller estimated that Claremont’s bad debt expense for 2016 would be \($14,500\). In June of 2016, Claremont received confirmation that one of its outstanding accounts receivable in the amount of \($13,500\) had gone into bankruptcy, and thus would not be collected.

In discussions with the firm’s independent auditor, the CFO of Claremont Enterprises learned that while an estimate of expected uncollectible accounts was permitted for purposes of preparing its U.S. GAAPbased annual report, the U.S. Treasury Department only allowed firms to deduct actual, known uncollectible accounts for purposes of preparing their income tax returns.

Required

Prepare a schedule showing the company’s income tax expense, its income tax payable, and its deferred income tax balance for 2015 and 2016. Assume an effective tax rate of 30 percent and that Claremont has no other expenses other than the bad debt expense. Do you agree with the tax policy of the U.S. Treasury Department regarding the treatment of bad debts? Why or why not?