Final answer:
The recording of an allowance for uncollectible accounts and the write-offs against this allowance have no effect on York City water utility's revenues and expenses, as the estimate has already been accounted for when the revenues were recorded.
Step-by-step explanation:
If York City estimates 2 percent of its water utility's monthly billings to be uncollectible, this estimate is accounted for by recording an allowance for doubtful accounts. When the water utility writes off the accounts receivable, the write-off is made against the allowance account. This accounting action does not directly affect the revenue account since the estimation for bad debts has already been factored into revenues at the time of recording them. Consequently, the revenue remains unchanged because the estimated bad debt expense was recognized when the revenue was recorded.
On the expense side, the establishment of an allowance for doubtful accounts is the recording of the estimated bad debt expense. When the actual write-offs occur, they reduce the allowance but do not affect the expense since the expense was already recognized on estimation. If the estimated amount (2 percent in this case) is still deemed appropriate, the expense does not change because the actual write-offs would have been anticipated by the original estimate.
The correct answer to the effect on revenues and expenses due to recording of an allowance for estimated uncollectible accounts receivable and the subsequent write-offs would be:
- No effect on Revenues
- No effect on Expenses
Therefore, the correct option is d. No effect No effect.