Multiple Choice
The amount by which overhead incurred during a period exceeds the overhead applied to jobs is called:
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
Under the allowance method, the write-off of accounts receivable:
A
increases total assets and net income
B
increases the allowance for doubtful accounts
C
does not affect net accounts receivable or net income
D
decreases net accounts receivable and net income
Verified step by step guidance1
Understand the allowance method: The allowance method is used to account for uncollectible accounts receivable. It involves estimating bad debts and recording them as an expense, while also creating an allowance for doubtful accounts (a contra-asset account).
Analyze the write-off process: When an account is written off under the allowance method, the company removes the specific account receivable from its books and reduces the allowance for doubtful accounts by the same amount.
Determine the impact on net accounts receivable: Net accounts receivable is calculated as accounts receivable minus the allowance for doubtful accounts. Since both the accounts receivable and the allowance for doubtful accounts decrease by the same amount during a write-off, net accounts receivable remains unchanged.
Evaluate the impact on net income: The write-off does not affect net income because the expense for bad debts was already recognized earlier when the allowance for doubtful accounts was created. The write-off is simply an adjustment to the accounts, not a new expense.
Conclude the effects: The write-off under the allowance method does not affect net accounts receivable or net income, as it is a reclassification within the balance sheet accounts.
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