Multiple Choice
Which of the following would typically be covered under a renter's insurance policy?
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1. Introduction to Accounting
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What is the primary purpose of the reinstatement provision in financial accounting?
A
To mandate the immediate recognition of all contingent liabilities
B
To require companies to revalue their assets at fair market value each year
C
To permit the reversal of depreciation expense on fixed assets
D
To allow a previously written-off account to be restored to active status if payment is received
Verified step by step guidance1
Understand the concept of a reinstatement provision: In financial accounting, the reinstatement provision allows a previously written-off account (such as a bad debt) to be restored to active status if payment is received.
Recognize the context of written-off accounts: When a company determines that a receivable is unlikely to be collected, it writes off the account, removing it from the books as an asset.
Learn the purpose of reinstatement: If the customer later pays the amount owed, the reinstatement provision ensures the company can reverse the write-off and record the payment appropriately.
Clarify the accounting treatment: The reinstatement involves reversing the previous write-off entry and recording the payment as a cash inflow or receivable recovery.
Understand why the other options are incorrect: The reinstatement provision does not mandate recognition of contingent liabilities, require annual revaluation of assets, or permit reversal of depreciation expense. Its sole purpose is to restore written-off accounts upon payment.
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