Answered: On December 1, Anson's Drug Store…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter6: Cash And Receivables

Section: Chapter Questions

Problem 3MC: A company is in its first year of operations and has never written off any accounts receivable as...

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Question

On December 1, Anson's Drug Store concluded that a customer's $325 account receivable was uncollected and that the account should be written off. What effect will this write-off have on the company's net income and balance sheet totals assuming the direct write-off method is used to account for bad debts?

a. decrease in net income; decrease in total assets

b. no effect on net income; no effect on total assets

c. increase in net income; no effect on total assets

d. no effect on net income; decrease in total assets

Expert Solution

Step 1

In the direct write-off method the bad debt expense is debited and the accounts receivable account is credited. This means there is an increase in expense that will result in a decrease in net income and there is a decrease in the current assets (accounts receivable) that will result in an overall decrease in total assets in the balance sheet.

Therefore the effect of the write-off will be a decrease in net income; decrease in total assets.

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