1. If Hawthorne uses cash basis for tax purposes, how much taxable income should it report in 2021 based solely on the information given?

2. For 2022? (ignore collections – the question gets at the effect of the write-off)

3. If Hawthorne uses the accrual basis for tax purposes, how much taxable income should it report in 2021? (hint: the answer is not the same as in the last assignment)

4. For 2022? (ignore collections – the question gets at the effect of the write-off)

5. The purpose of this assignment is to teach you that the accrual method for tax purposes differs from traditional accrual for financial accounting purposes.
   1. In what way are they similar (financial accrual and tax accrual)?

2. In what way are they different?

6. (Optional but required for the potential to earn maximum points) i.e. for potential:  There is a special tax accrual method that is closer to traditional financial accounting accrual.  What is the name of that special method?  Please explain why that method is not appropriate for this example (Hint:  Review the Gleim 3 MC solutions.  Another hint: This example is incomplete.  The name of the company is Hawthorne Manufacturing so there is obviously a major expense missing).

Infomation:
Hawthorne Manufacturing Company started operations in 2021. It had sales of $1,200,000 and collections of $895,000, leaving a balance of $305,000 in accounts receivable as of December 31, 2021.

Accounts Receivable
1/1/2021		0
Sales		1,200,000
Collections					895,000
12/31/2021		305,000

At the end of 2021, Hawthorne’s analysis indicates it expects to collect $280,000 of its accounts receivable, so it must establish an allowance for uncollectible accounts of $25,000 ($305,000 − 280,000)

Allowance for Uncollectible Accounts
1/1/2021	0
Bad debt expense	25,000
12/31/2021	25,000

Journal Entry	Debit	Credit
Bad debt expense	25,000
Allowance for uncollectible accounts		25,000

When accounts are deemed uncollectible.

On April 24, 2022, Hawthorne concludes that it will not collect a $15,000 account receivable from a customer that recently has gone bankrupt.

Journal Entry	Debit	Credit
Allowance for uncollectible accounts	15,000
Accounts receivable		15,000

Accounts Receivable
1/1/2022	305,000
Specific write-off			15,000
	290,000

Allowance for Uncollectible Accounts
1/1/2022			25,000
Specific write-off	15,000
			10,000