A/R Uncollectible Accounts

Question 1

A company estimates its bad debt expense each year as 4 percent of credit sales. In the current period, one balance of $9,000 from a particular customer is determined to be uncollectible and is written off. Which of the following statements is true? -

Answer 1

Writing off an account as uncollectible is recorded as a reduction to both accounts receivable and the allowance for doubtful accounts. Thus, the net receivable is unchanged and no income effect is recorded. For example, if the accounts receivable balance is $400,000 and the allowance is $20,000, the net receivable is reported as $380,000. After a $9,000 write off, the receivable is $391,000 and the allowance is $11,000 and the net figure stays at $380,000

Question 2

A company estimates its bad debt expense each year as 4 percent of credit sales. In the current period, one balance of $9,000 from a particular customer is determined to be uncollectible and is written off. Which of the following statements is true?

Answer 2

This write-off reduces the allowance for doubtful accounts on that date but not net income.