Multiple Choice
The amount of current assets minus current liabilities is called:
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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, a loss incurred by a corporation due to an uncollectible account is recorded as:
A
A debit to Bad Debt Expense and a credit to Accounts Receivable
B
A debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable
C
A debit to Accounts Receivable and a credit to Bad Debt Expense
D
A debit to Cash and a credit to Bad Debt Expense
Verified step by step guidance1
Understand the direct write-off method: This method records bad debts only when they are determined to be uncollectible, rather than estimating them in advance. It does not use an allowance account.
Identify the accounts involved: When an account is deemed uncollectible, the corporation needs to record the loss by reducing Accounts Receivable (credit) and recognizing the expense through Bad Debt Expense (debit).
Determine the journal entry: The direct write-off method requires a debit to Bad Debt Expense to reflect the loss and a credit to Accounts Receivable to remove the uncollectible amount from the books.
Compare the options provided: Match the correct journal entry to the options given. The correct answer is the one that debits Bad Debt Expense and credits Accounts Receivable.
Understand why other options are incorrect: For example, the allowance method uses Allowance for Doubtful Accounts, which is not applicable here. Similarly, debiting Accounts Receivable or Cash does not align with the direct write-off method.
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