Raven Finance Company experiences bad debts of about 3% of its outstanding loans. At the end of the year, the company had outstanding receivables of $18 million. This balance included $2 million of accrued interest receivable. Raven's loan loss reserve for the year was computed as follows:
Balance, January 1, 2016........................................$500,000
Accounts written off as uncollectible
Loans made in 2016..............................................(20,000)
Loans made in prior years.......................................(40,000)
Collections on loans previously written off.....................15,000
Adjustment to required balance...................................85,000
Balance, December 31, 2016....................................$540,000
a. Determine the effects of the above on Raven's taxable income for 2016.
b. Assume that Raven has used the reserve method to compute its taxable income for the 10 years the company has been in existence. In 2016, you begin preparing Raven's tax return. What should be done with regard to the reserve?