There are two methods for accounting for uncollectible accounts receivable, dire

Question

There are two methods for accounting for uncollectible accounts receivable, direct write-off and the allowance method. Under the allowance method, the write-off of a specific accounts receivable:

Please add checkmark next to the correct answer(s).

1decreases net income and decreases accounts receivable.

2decreases net income and decreases working capital.

3affects neither net income nor accounts receivable.

4affects neither net income nor working capital.

5increases bad debt expense and increases the allowance for doubtful accounts.

Explanation / Answer

Direct Write off method: In this method the we book the expenses as bad debts and reduce from the account receivable the same value. Allowance Method of Bad Debts: The allowance for doubtful accounts is a provision of the bad debts that reduces the reported amount of accounts receivable. at the same time we reduce the net income by showing the amount as expenses Option 1 Decrease net income and decrease account receivable This option is correct because the it reduces net income and account receivable Answer = Correct Option Option 2 Decrease in net income and decrease in working capital Yes, This option is also correct because the account recivable will reduce then it impacts on working cpaital also Answer = Correct Option Option =3 affects neither net income nor accounts receivable. This option is incorrect because it impact on net income and account recivable Answer = Incorrect Option Option =4 affects neither net income nor working capital. This option is incorrect because it impact on working Capital Answer = Incorrect Option Option =5 increases bad debt expense and increases the allowance for doubtful accounts. Yes This increases the bad debts and doubtful accounts So, This statement is Correct Answer = Correct Option

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