Multiple Choice
When recording the estimated uncollectible accounts using the allowance method, which of the following best describes the effect on the Allowance for Doubtful Accounts?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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Under the allowance method, when is an account typically considered uncollectible?
A
When the customer is more than 30 days late on payment
B
When the allowance for doubtful accounts balance reaches zero
C
When all reasonable collection efforts have failed and management determines the account will not be collected
D
When the account is initially recorded as a receivable
Verified step by step guidance1
Understand the allowance method: The allowance method is a technique used in accounting to estimate and account for bad debts (uncollectible accounts). It involves creating an allowance for doubtful accounts, which is a contra-asset account that reduces accounts receivable on the balance sheet.
Identify the criteria for uncollectibility: Under the allowance method, an account is typically considered uncollectible when all reasonable collection efforts have failed, and management determines that the account will not be collected. This decision is based on evidence such as prolonged non-payment, inability to contact the customer, or bankruptcy of the debtor.
Recognize the timing of uncollectibility: The determination of uncollectibility does not depend on arbitrary time frames (e.g., 30 days late) or the balance of the allowance for doubtful accounts. It is based on the judgment of management after evaluating the specific circumstances of the account.
Understand the accounting treatment: Once an account is deemed uncollectible, it is written off by debiting the allowance for doubtful accounts and crediting accounts receivable. This ensures that the write-off does not impact the income statement, as the expense was already recognized when the allowance was created.
Review the incorrect options: The other options provided in the problem (e.g., 30 days late, allowance balance reaching zero, or initial recording as a receivable) do not align with the principles of the allowance method. These are not valid criteria for determining uncollectibility under this method.
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