Question

Madison Corporation uses the allowance method to value its accounts receivable and is making the annual adjustments at fiscal year-end, November 30. The proportion of uncollectible accounts is estimated based on past experience, which indicates 1.5% of net credit sales will be uncollectible. Total sales for the year were $2,000,000, of which $200,000 were cash transactions. Madison has determined that the Norris Corporation accounts receivable balance of $10,000 is uncollectible and will write off this account before year-end adjustments are made. Listed below are Madison's account balances at November 30 prior to any adjustments and the $10,000 write-off.

Sales $2,000,000
Accounts receivable 750,000
Sales discounts 125,000
Allowance for doubtful accounts 16,500
Sales returns and allowances
175,000
Bad debt expense 0
The entry to write off Norris Corporation's accounts receivable balance of $10,000 will
a) Increase total assets and decrease net income.
b) Decrease total assets and net income.
c) Have no effect on total assets and decrease net income.
d) Have no effect on total assets and net income.

Answer 1

The entry to write off Norris Corporation's accounts receivable balance of $10,000 will have no effect on total assets and decrease net income.

Step-by-step explanation:

The entry to write off Norris Corporation's accounts receivable balance of $10,000 will have no effect on total assets and decrease net income.

When an account is deemed uncollectible, it is removed from the accounts receivable balance and the Allowance for Doubtful Accounts is reduced by the same amount. This write-off does not affect total assets because both accounts decrease by the same amount. However, since the account is no longer considered collectible, it is recognized as a loss, which reduces net income.