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On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.
-Assume that the Loudoun Corporation uses the direct write-off method.Which of the following correctly describes the effect of the write-off of the customer's account on Loudoun's financial statements?

Question

Quizplus · Accepted Answer

If Loudoun uses the direct write-off method, the write-off will decrease assets (accounts receivable) and stockholders' equity (retained earnings). It increases expenses (uncollectible accounts expense), which decreases net income. It does not affect the statement of cash flows.

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