Multiple Choice
When is it acceptable to use the direct write-off method for uncollectible accounts?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
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On January 8th, your account was charged $30.00 for an overdraft fee. What is the most likely reason for this charge under the direct write-off method in accounting?
A
Interest income was recorded on an outstanding receivable.
B
A customer paid their account in full before the due date.
C
A previously written-off account was recovered and collected.
D
A check was written for more than the available balance, causing the account to go negative.
Verified step by step guidance1
Step 1: Understand the context of the problem. The overdraft fee of $30.00 is charged because a check was written for more than the available balance in the account, causing the account to go negative. This is unrelated to the direct write-off method in accounting, which deals with uncollectible accounts receivable.
Step 2: Clarify the direct write-off method. This method is used to account for bad debts by directly writing off uncollectible accounts receivable as an expense when it is determined that the amount will not be collected. It does not involve overdraft fees or negative balances in bank accounts.
Step 3: Analyze the options provided. The first three options (interest income recorded, customer paying early, and recovery of a previously written-off account) are related to accounting transactions but do not explain the overdraft fee. The correct answer is the fourth option, which directly addresses the cause of the overdraft fee.
Step 4: Relate the overdraft fee to banking practices. Overdraft fees occur when a check or withdrawal exceeds the available balance in the account. This is a banking issue rather than an accounting method issue, and it is unrelated to the direct write-off method.
Step 5: Conclude that the correct answer is based on the banking transaction (writing a check for more than the available balance), not an accounting method like the direct write-off method. This distinction is important for understanding the nature of the fee.
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