Multiple Choice
In the context of net accounts receivable, consider the numbers 140,395 and 241,638. The value of the digit 3 in 140,395 is how many times the value of the digit 3 in 241,638?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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What is the effect of writing off a specific account receivable under the direct write-off method?
A
Total liabilities decrease.
B
Total assets remain unchanged.
C
Net accounts receivable increases.
D
Net income increases.
Verified step by step guidance1
Understand the direct write-off method: Under this method, a specific account receivable is written off when it is deemed uncollectible. This means the company directly reduces the accounts receivable balance and records it as an expense in the income statement.
Analyze the impact on total assets: Writing off an account receivable reduces the accounts receivable (an asset) but simultaneously increases the bad debt expense (a reduction in net income). Since both are part of the same financial statement, the total assets remain unchanged.
Consider the impact on liabilities: Writing off an account receivable does not affect liabilities because it only involves accounts receivable and bad debt expense, which are not related to liabilities.
Evaluate the impact on net accounts receivable: Net accounts receivable is the total accounts receivable minus the allowance for doubtful accounts. Under the direct write-off method, there is no allowance account, so the net accounts receivable decreases directly by the amount written off.
Assess the impact on net income: Writing off an account receivable increases bad debt expense, which reduces net income. Therefore, net income does not increase; it decreases instead.
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