Multiple Choice
Under the direct write-off method, how are uncollectible accounts accounted for on the financial statements?
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7. Receivables and Investments
Net Accounts Receivable: Direct Write-off Method
Multiple Choice
Which of the following best describes how the direct write-off method affects net accounts receivable on the balance sheet?
A
Bad debts are written off only when they are determined to be uncollectible, reducing accounts receivable and net accounts receivable at that time.
B
Bad debts are written off at the end of each month regardless of payment history.
C
Bad debts are never recognized, so net accounts receivable is always equal to total accounts receivable.
D
Bad debts are estimated and recorded as an allowance, reducing net accounts receivable immediately.
Verified step by step guidance1
Step 1: Understand the direct write-off method. This method involves recognizing bad debts only when they are determined to be uncollectible, rather than estimating them in advance.
Step 2: Analyze how the direct write-off method impacts accounts receivable. When a bad debt is identified, the specific amount is removed from accounts receivable, reducing the total accounts receivable balance.
Step 3: Consider the timing of the adjustment. Since bad debts are written off only when they are confirmed as uncollectible, the reduction in accounts receivable and net accounts receivable occurs at that specific time.
Step 4: Compare this method to other approaches, such as the allowance method. Unlike the direct write-off method, the allowance method estimates bad debts in advance and records them as an allowance, reducing net accounts receivable immediately.
Step 5: Evaluate the options provided in the problem. The correct description aligns with the direct write-off method, where bad debts are written off only when determined uncollectible, impacting accounts receivable and net accounts receivable at that time.
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