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Roshini
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| Posted: 27 May 2009 at 15:03 | IP Logged
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Gibbs Co. uses the allowance method for recognizing
uncollectible accounts. Ignoring deferred taxes, the
entry to record the write-off of a specific
uncollectible account:
a.Affects neither net income nor working capital
b.Affects neither net income nor accounts receivable
c.decreases both net income and accounts receivable
d.decreases both net income and working capital
The correct answer is a.
My doubt is why not b. as A/R is part of working
capital.
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qualler
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| Posted: 27 May 2009 at 16:04 | IP Logged
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The write-off of A/R is basically a wash, because the J/E is as follows:
Allowance for Doubtful Accounts XX
Accounts Receivable &n bsp; &n bsp; XX
Therefore working capital and net income is not affected. A write-off using the allowance method simply reduces the amount in the allowance, whereas A/R is reported net of ADA on the balance sheet.
Hope that makes sense!
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Roshini
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| Posted: 28 May 2009 at 06:14 | IP Logged
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Hi qualler,
I still don't get it, the J/E for write off under
allowance method is
Bad debts expense a/c xxx
Allowance for uncollectible a/c xxx
Therefore i think gross A/R is still unaffected whereas
net A/R will change because of effect on uncollectible
a/c .
when net adjusted A/R is effected even the working
capital is affected.
I am confused. Am i not getting the question right.
Please clarify.
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I am a M.com,Grad CWA from india now residing at new jersey
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qualler
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| Posted: 28 May 2009 at 07:23 | IP Logged
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No, the J/E you just posted is just the J/E for recognizing bad debt expense. Writing off your allowance is a different journal entry. The only way your allowance account can get reduced is by writing off your allowance. That is different from the Direct Write-off method, which of course is not GAAP.
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Jdot514
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| Posted: 28 May 2009 at 11:31 | IP Logged
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The entry to ESTIMATE bad debts:
Bad debts expense xxx
Allowance for uncollectible xxx
The entry to WRITE OFF bad debts (actual amounts, not estimates):
Allowance for uncollectible xxx
Accounts Receivable xxx
Basically, the allowance is only used as an estimate. Once you know exactly how much is uncollectible, you eliminate that portion of the allowance account and directly reduce the accounts receivable. I hope this clears it up for you.
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Topic: A/R question doubt
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