A firm records bad debt expenses on an accrual basis for financial reporting and on a cash basis for tax reporting. In its 1999 annual report, it reported that the opening and closing balances in Allowance for Uncollectibles (a contra against receivables)

were $1,200 million and $1,650 million, respectively, and that customers owing $550 million defaulted during the year. The company’s tax rate is 40 percent. How much is the deferred tax asset as a result of this temporary difference between financial and tax reporting? If 30 percent of the asset is deemed to be unrecoverable, how would the transaction be recorded? As a financial analyst, what questions would you raise with the firm’s CFO about the firm’s deferred tax asset?

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