The adjustment for bad debts using the percentage of receivables ignored the credit balance in the Allowance account.This error would cause:
A)total assets to be overstated.
B)total liabilities to be understated.
C)net income to be understated.
D)None of these is correct.

Question

Quizplus · Accepted Answer

The error of ignoring the credit balance in the Allowance account would result in the overstatement of accounts receivable and the understatement of the allowance for doubtful accounts. As a result, the net realizable value of accounts receivable (which is the difference between accounts receivable and allowance for doubtful accounts) would be lower than it actually is. This would cause an understatement of net income because bad debt expense would be understated, leading to a lower expense and higher net income.

The Adjustment for Bad Debts Using the Percentage of Receivables