Multiple Choice
Under the allowance method, when is an account considered uncollectible?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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When the allowance method is used, the write-off of an uncollectible account:
A
Decreases net accounts receivable and net income.
B
Does not affect net accounts receivable or net income.
C
Decreases net income but does not affect net accounts receivable.
D
Increases the allowance for doubtful accounts.
Verified step by step guidance1
Understand the allowance method: The allowance method is used to account for uncollectible accounts by estimating bad debts in advance and recording them in the Allowance for Doubtful Accounts, a contra-asset account.
Recognize the impact of a write-off: When an account is written off, the company removes the specific receivable from Accounts Receivable and reduces the Allowance for Doubtful Accounts by the same amount. This does not affect net accounts receivable or net income because the write-off is already accounted for in the allowance estimate.
Analyze net accounts receivable: Net accounts receivable is calculated as Accounts Receivable minus the Allowance for Doubtful Accounts. Since both accounts are reduced by the same amount during a write-off, the net accounts receivable remains unchanged.
Consider net income: The write-off does not affect net income because the expense related to bad debts was already recorded when the allowance was established. The write-off is simply an adjustment to the balance sheet accounts.
Conclude the correct answer: Based on the above analysis, the write-off of an uncollectible account under the allowance method does not affect net accounts receivable or net income.
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