Green Company wrote off a client’s account receivable of $400 as uncollectible. What will be the...

Green Company wrote off a client’s account receivable of $400 as uncollectible. What will be the effect on net income under each of the following methods of recognizing bad debt expense? (Consider what accounts are changed in the journal entry and how each effects the calculation of net income.)

	A.	Direct WriteOff Allowance Decrease None
	B.	Direct WriteOff Allowance Decrease Decrease
	C.	Direct WriteOff Allowance None None
	D.	Direct WriteOff Allowance None Decrease

Expert Solution

When Direct Write off Method is used, the entry to write off amount will be:

Accounts title	Debit	Credit
Bad Debt Expenses	$ 400.00
Accounts receivables		$ 400.00

If Allowance method is used, the entry would be:

Accounts title	Debit	Credit
Allowance account	$ 400.00
Accounts receivables		$ 400.00

In the #1 Entry, Bad Debt Expense gets debited which form part of Income Statement and hence NET INCOME would DECREASE.
In the #2 Entry, none of the account debited or credited affect Income Statement and hence NET INCOME will not be affected.
Correct Answer: Option ‘A’

Direct Write off: Net Income would Decrease.
Allowance: None effect of Net Income

ekkarill92 answered 1 year ago

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