Question

Lundstrom Company began making sales on credit during 20X1. The company used the direct write-off method for uncollectible accounts. A material amount of uncollectible accounts resulting from sales made during 20X1 were written off during 20X2. What was the effect of this write-off on net income for 20X1 and 20X2?

a.20X1 - Overstate
20X2 - Overstate
b.20X1 - Overstate
20X2 - Understate
c.20X1 - Understate
20X2 - Overstate
d.20X1 - Understate
20X2 - Understate

Answer 1

The effect of writing off uncollectible accounts on net income depends on the accounting method used. For Lundstrom Company, using the direct write-off method, there is no effect on net income in 20X1, but net income is decreased in 20X2.

Step-by-step explanation:

The effect of writing off uncollectible accounts on net income depends on the accounting method used. In this case, Lundstrom Company used the direct write-off method.

For 20X1, the write-off of uncollectible accounts would have no effect on net income because the direct write-off method recognizes bad debts only when they are confirmed as uncollectible.

For 20X2, the write-off of the material amount of uncollectible accounts would decrease net income. This is because it represents an expense incurred in the current year, reducing the company's profitability.