Question

Echo Corporation had the following balances immediately prior to writing off a $100 uncollectible account:

Current assets $30,000
Accounts receivable 3,300
Allowance for doubtful accounts 300
Current liabilities 10,000

Required:
Calculate the following amounts or ratios and determine the relationship between the amount or ratio before the write-off (x) with the amount or ratio after the write-off (y);

Amount or Ratio Possibilities
1. Current ratio a. x more than y
2. Net accounts receivable balance b. x equals y
3. Gross accounts receivable balance c. x less than y
d. cannot be determined

Answer 1

1. Current Ratio

= Current assets/ Current liabilities

= 30,000/10,000

= 3

b. x equals y

The $100 uncollectible will be written off from the Allowance for doubtful debt account and so will not affect the Accounts Receivable (current asset) so the ratio before and after write-off will be equal.

2. Net accounts receivable balance

= Accounts receivable - Allowance for doubtful accounts

= 3,300 - 300

= $3,000

b. x equals y

The $100 uncollectible will be taken from the Allowance account and so will not affect the reduction from the Accounts receivable.

3. Gross accounts receivable balance

Before write off = $3,300

After write off = 3,300 - 100 = $3,200

a. x more than y

Using the gross method means that there is no Allowance account and the write-off will completely be from the Accounts receivable so the amount before write-off will be more than the amount after.