15
a. Journal Entry No. 2
Respondent contends that journal entry No. 2 is incorrect.
Journal entry No. 2 increased the cost of new cars by $10,000 and
used cars by $21,789 and credited the allowance for doubtful
accounts (a "contra account”)2 by $31,789. Respondent argues
that petitioners have not shown that these amounts were correct.
Respondent contends that amounts in the contra account had
already reduced income, and that reducing this account at yearend
resulted in a double reduction of income. Respondent contends
that this adjustment should have been made for 1987, not 1988.
We disagree.
Kane made journal entry No. 2 to correct an entry
erroneously made by the dealership's bookkeeper to a nonexistent
account called "allowance for doubtful accounts". The bookkeeper
should have made the entry to the expense account. Journal entry
No. 2 corrected this error. It did not affect the dealership's
taxable income.
Respondent has offered no support for the contention that
journal entry No. 2 should have been made in 1987. Bob Wade Ford
2 A contra account is the functional equivalent of a reserve
for a bad debt. See Thor Power Tool Co. v. Commissioner, 64 T.C.
154, 156 (1975), affd. 563 F.2d 861 (7th Cir. 1977), affd. 439
U.S. 522 (1979); Hutton v. Commissioner, 53 T.C. 37, 39 (1969).
Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NextLast modified: May 25, 2011