Multiple Choice
When calculating Net Accounts Receivable, how does the Allowance for Doubtful Accounts affect the reported amount on the balance sheet?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
Which of the following statements about the Allowance for Doubtful Accounts is FALSE?
A
Writing off a specific account receivable affects the net realizable value of accounts receivable.
B
The balance in the Allowance for Doubtful Accounts represents management's estimate of accounts receivable that will not be collected.
C
The Allowance for Doubtful Accounts is used to estimate uncollectible accounts before specific accounts are identified as uncollectible.
D
The Allowance for Doubtful Accounts is a contra-asset account that reduces Accounts Receivable on the balance sheet.
Verified step by step guidance1
Step 1: Understand the concept of Allowance for Doubtful Accounts. It is a contra-asset account used to estimate the portion of accounts receivable that may not be collected. This estimation is based on historical data and management's judgment.
Step 2: Review the impact of writing off a specific account receivable. When an account is written off, it reduces both the Allowance for Doubtful Accounts and Accounts Receivable by the same amount, leaving the net realizable value unchanged.
Step 3: Analyze the statement 'The balance in the Allowance for Doubtful Accounts represents management's estimate of accounts receivable that will not be collected.' This is true because the account is designed to reflect the estimated uncollectible portion of receivables.
Step 4: Evaluate the statement 'The Allowance for Doubtful Accounts is used to estimate uncollectible accounts before specific accounts are identified as uncollectible.' This is also true, as the allowance method anticipates potential losses before they occur.
Step 5: Examine the statement 'The Allowance for Doubtful Accounts is a contra-asset account that reduces Accounts Receivable on the balance sheet.' This is correct because the allowance account is subtracted from Accounts Receivable to show the net realizable value.
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