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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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A company is in its first year of operations and has never written off any accounts receivable as uncollectible. When the allowance method of recognizing bad debt expense is used, the entry to recognize that expense:

  1. a. increases net income
  2. b. decreases current assets
  3. c. has no effect on current assets
  4. d. has no effect on net income

To determine

Identify the entry used that is used for recognizing the bad debt expense under the allowance method.

Explanation

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debt account.

Justification for the incorrect answer:

Option a:

When bad debt expense are recognized by the company by using allowance method it expense are written off by removing the amount form the accounts receivable account. Removing of amount from the accounts receivable to recognize the expense does not increase the value of net income. Therefore, Option a is an incorrect answer.

Option c:

When bad debt expense are recognized by the company by using allowance method it expense are written off by removing the amount form the accounts receivable account. Accounts receivable are classified under the head current assets on the balance sheet...

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