Question: Please help solve and explain this problem. Pepe's reports bad debt expense using the allowance method. For tax purposes, the direct write-off method is used.

Please help solve and explain this problem.

Pepe's reports bad debt expense using the allowance method. For tax purposes, the direct write-off method is used. At the end of the current year, they had accounts receivable and an allowance for doubtful accounts of $3,000,000 and $150,000. They also had taxable income of $1,000,000. At the end of the previous year, Pepe's reported a deferred tax asset of $85,000 related to the difference in reporting bad debts and is the only temporary difference. The tax rate is 40%.

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