Question

TRUE OR FALSE 1. UNDER ALLOWANCE METHOD FOR UNCOLLECTIBLE ACCOUNTS, BAD DEBT WRITE OFF HAS NO EFFECT ON FINANCIAL STATEMENT

2. AFTER ADJUSTMENT, THE BALANCE IN THE ALLOWANCE FOR DOUBTFUL ACCOUNTS HAS THE EFFECT OF REDUCING ACCOUNTS RECEIVABLE TO ITS ESTIMATED REALIZABLE VALUE

3. THE ADVANTAGE OF THE ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS IS THAT IT IDENTIFIES THE SPECIFIC CUSTOMERS WHO WILL NOT PAY THEIR BILLS

Answer 1

Question 1 -

The statement is True.

Explanation -

Under allowance method at the end of the year bad debts provision entry will be made by debiting Bad debts expenses and credit Provision for doubtful debt.

Due to such provision entry at the year end, while writing off bad debts does not impact the financial statement (Income Statement).

Write off entry under allowance method =

DR Allowance for doubtful debt

CR Accounts Receivable

Question 2 -

The statement is True.

Explanation -

Under allowance for doubtful account method provision made at the end of every year for the accounts which company finds doubtful to recover. Company make the financial statement as follows -

Accounts Receivable (Gross) = $10,000 DR
Allowance for doubtful accounts = $2,000 CR
Accounts Receivable (Net) = $8,000 DR

Question 3 -

The statement is False.

Explanation -

Under Allowance for doubful account company makes the provision for those account which are doubtful in nature. Those accounts are not specific to the customer. Those are % of gross accounts receivables.

Hence this provision are not related to specific customer.

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