Multiple Choice
Which of the following costs is irrelevant to business decisions when using the direct write-off method for uncollectible accounts?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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Under the direct write-off method, how does writing off an uncollectible account affect net accounts receivable?
A
Net accounts receivable is only affected at year-end.
B
Net accounts receivable increases by the amount written off.
C
Net accounts receivable remains unchanged.
D
Net accounts receivable decreases by the amount written off.
Verified step by step guidance1
Understand the direct write-off method: Under this method, an uncollectible account is directly written off as an expense when it is determined to be uncollectible, rather than estimating bad debts in advance.
Recall the formula for net accounts receivable: Net accounts receivable = Accounts receivable - Allowance for doubtful accounts. However, under the direct write-off method, there is no allowance account; the write-off directly reduces accounts receivable.
When an uncollectible account is written off, the accounts receivable balance is reduced by the amount of the write-off. This is because the company no longer expects to collect this amount from the customer.
Since net accounts receivable is directly tied to the accounts receivable balance, any reduction in accounts receivable due to a write-off will also reduce net accounts receivable by the same amount.
Conclude that under the direct write-off method, writing off an uncollectible account decreases net accounts receivable by the amount written off.
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