CANDY COMPANY, AN ACCRUAL BASIS TAXPAYER, WHOLESALES $15,000 WORTH OF CANDY ON ACCOUNT TO A LARGE DEPT STORE AT HALLOWEEN. IN FEB OF YEAR 2, THE NEWSPAPER HAS AN ARTICLE ABOUT THIS CHAIN OF STORES CLOSING PERMANENTLY. ALL CREDITORS ARE EXPECTED TO RECEIVE 10% OF THEIR UNSECURED DEBT. CANDY COMPANY WROTE OFF $13,500 OF THE DEBT IN YEAR 2. IN YEAR 3, CANDY COMPANY RECEIVES 3000 AS A FINAL SETTLEMENT. WHAT EFFECT DOES THIS HAVE ON COMPANY TAXES FOR YEAR 3.

AMEND THE YEAR 2 TAX RETURN TO SHOW 12,000 WORTH OF BAD DEBT

COMPANY MUST RECOGIZE 1500 OF INCOME FROM BAD DEBT RECOVERY

COMPANY MUST RECOGNIZE 3000 OF INCOME FROM BAD DEBT RECOVERY

THERE IS NO EFFECT ON THE TAXES SINCE THIS RECOVERY WAS FROM BANKRUPTCY.