Multiple Choice
Under the allowance method, when is bad debt expense recognized?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Under the allowance method, what does a company estimate in relation to accounts receivable?
A
The amount of inventory that will be sold on credit
B
The total cash sales for the period
C
The total interest revenue from notes receivable
D
The amount of accounts receivable that is expected to be uncollectible
Verified step by step guidance1
Understand the allowance method: The allowance method is a technique used in accounting to estimate and account for bad debts (uncollectible accounts) related to accounts receivable.
Recognize the purpose: Under this method, a company estimates the portion of accounts receivable that is expected to be uncollectible, based on historical data, industry trends, or other relevant factors.
Identify the key concept: The estimation is recorded as an expense (bad debt expense) in the income statement and as a contra-asset account (allowance for doubtful accounts) in the balance sheet.
Learn the impact: This approach ensures that the financial statements reflect a more accurate picture of the company's financial position by accounting for potential losses from uncollectible accounts.
Clarify the distinction: The allowance method does not estimate inventory sold on credit, total cash sales, or interest revenue from notes receivable. Its sole focus is on accounts receivable and the expected uncollectible portion.
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