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CFA Level I · CFA Level I Exam · Analyzing Balance Sheets

A company reports gross trade receivables of 500,000 and an allowance for expected credit losses of 20,000. During the year it writes off a specific receivable of 8,000 as uncollectible. The write-off will most likely cause net receivables to:

Net receivables remain unchanged and bad debt expense is unaffected. Under the allowance method the write-off reduces both gross receivables and the allowance by 8,000, so the net amount stays at 480,000. The expense was already recognised when the allowance was established.

  1. Adecrease by 8,000 and increase bad debt expense by 8,000.
  2. Bdecrease by 8,000 and leave bad debt expense unchanged.
  3. Cremain unchanged and leave bad debt expense unchanged.Correct

Explanation

Under the allowance method, a write-off reduces gross receivables and the allowance by the same 8,000. Net receivables stay at 480,000 before and after, and no expense arises because the expense was recognised when the allowance was created.

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