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writeoffs of bad debts (i.e., total bad debts written off during
the year less any recoveries) and (2) the annual increase or
decrease in the aggregate Uncollectible Amount (i.e., the
aggregate amount that petitioners estimated would not be
collected on accounts receivable outstanding at yearend) computed
on the basis of the modified periodic system. Respondent agrees
that petitioners' reductions for net writeoffs of bad debts were
proper but does not agree with petitioners' computation of the
aggregate Uncollectible Amount.
For each petitioner qualified to use the nonaccrual-
experience method, petitioners computed the amount of the
negative section 481(a) adjustment relating to the change to that
method to be equal to the Uncollectible Amount as of December 31,
1986, as calculated under the modified periodic system.8 In the
case of those petitioners that had employed an overall accrual
method of accounting for taxable years ended prior to January 1,
1987, each petitioner's negative section 481(a) adjustment
relating to the change to the nonaccrual-experience method for
taxable years ended 1987 and 1988 equaled the amount of the net
positive section 481(a) adjustment relating to the repeal of the
reserve method of accounting for those years.
8 In other words, petitioners calculated the portion of
accounts receivable that would not be collected by multiplying
yearend accounts receivable by the ratio of writeoffs for bad
debts (adjusted for recoveries) for the current year and the 5
preceding years over the sum of the yearend accounts receivable
balances for the same 6-year period.
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