Chap020 (accounting) 75 - 30 After issuing its 2011...

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79. A company uses the aging method to estimate bad debt expense. Its tax rate is 30%. After issuing its 2011 financial statements, the firm discovered that it failed to write off $50,000 in receivables that were determined to be uncollectible in 2011. As a result of this error, net income was: A. Overstated by $35,000. B. Overstated by an undetermined amount. C. Understated by an undetermined amount. D. Unaffected. Receivables were overstated, so bad debt expense calculated as a percentage of receivables was also overstated. Therefore, net income was understated. The actual write-off would not have affected net income. AACSB: Analytic Bloom's: Analysis Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors; regardless of the type of error or the timing of its discovery. Level of Learning: Hard 80. A company uses the percentage of sales method to estimate bad debt expense. Its tax rate is
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Unformatted text preview: 30%. After issuing its 2011 financial statements, the firm discovered that it failed to write off $50,000 in receivables that were determined to be uncollectible in 2011. As a result of this error, net income was: A. Overstated by $35,000. B. Overstated by an undetermined amount. C. Understated by an undetermined amount. D. Unaffected. The actual write-off of receivables has no effect on net income when the allowance method is used. Because bad debt expense was based on sales, net income will not be affected by correcting the error. AACSB: Analytic Bloom's: Analysis Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors; regardless of the type of error or the timing of its discovery. Level of Learning: Hard...
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