Question

On October 12 of the current year, a company determined that a customer's account receivable was uncollectible and that the account should be written off. Assuming the direct write-off method is used to account for bad debts, what effect will this write-off have on the company's net income and total assets? Multiple Choice

a Decrease in net income; no effect on total assets.

b No effect on net income; no effect on total assets.

c Decrease in net income; decrease in total assets.

d Increase in net income; no effect on total assets.

e No effect on net income; decrease in total assets.

Answer 1

Using the direct write-off method, the write-off of an uncollectible account receivable causes a c. decrease in both net income and total assets, due to the credit to accounts receivable and the debit to bad debt expense.

Step-by-step explanation:

If a company writes off an account receivable under the direct write-off method, the entry to write off the account directly reduces the account receivable and the net income by debiting bad debt expense and crediting accounts receivable. This means that the correct answer is that there will be a decrease in net income; however, the total assets will also decrease because the accounts receivable (an asset) is reduced. Hence, when an account receivable is deemed uncollectible and is written off, it results in a simultaneous reduction of assets and net income.