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On October 29 of the current year, a company concluded that a customer’s $4,400 account receivable was uncollectible and that the account should be written off
On October 29 of the current year, a company concluded that a customer’s $4,400 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on this company’s net income and total assets assuming the allowance method is used to account for bad debts?
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- Decrease in net income; no effect on total assets
- No effect on net income; no effect on total assets
- Decrease in net income; decrease in total assets
- Increase in net income; no effect on total assets
- No effect on net income; decrease in total assets
Expert Solution
Answer: B .
When some amount of accounts receivable is expected to be uncollectible, then that portion of accounts receivable is written-off by the entity. If the entity uses the allowance method to written-off the account, the following entry takes place:
Allowance for doubtful accounts..................Dr $4,400
To accounts receivable..............................Cr $4,400
This transaction only affects the balance sheet account so net income is not affected by the written-off. Entry for the write-off an account will result in a decrease in the amount of the accounts receivable and allowance for doubtful accounts. As a result, it will not affect the net collectible balance of accounts receivable and hence, total assets are also not affected by the transaction of write-off an account.
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