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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Income Effects of Uncollectible Accounts

The credit manager and the accountant for Goldsmith Company are attempting to assess the effect on net income of writing off $100,000 of receivables. Goldsmith uses the aging method of determining bad debt expense and has the following aging schedule for its accounts receivable at December 31, 2019:

Chapter 5, Problem 94.1C, Income Effects of Uncollectible Accounts The credit manager and the accountant for Goldsmith Company

The receivables being considered for write-off are all over 60 days past due.

Required:

Assume that the tax rate is 30%. What will be the effect on net income if the $100,000 is written off?

To determine

Aging method:

This is a method in which the receivables are sorted according to their collectable estimation. This is done on the basis of their outstanding invoices period. Basically, aging means to check the how old an outstanding balance of receivable is present in the books.

The effect on net income if $1,00,000 is to be written off.

Explanation

In the given case, it is given that the credit manager and accountant of Goldsmith Company want to assess the effect of writing off the receivables of $1,00,000 on the net income. The company is using the aging method for determining the bad debt and they considers the amount of written off when such amount is uncollected by over 60 days. In this, such amount of over 60 days is $3,22,800 and the expected default is 0.250.

Now, as per the given information, the company wants to write off the receivables by $1,00,000</

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