Why Is the Allowance Method Preferred Over the Direct Write-Off

question 103

Multiple Choice

Why is the allowance method preferred over the direct write-off method of accounting for bad debts?

• A) Allowance method is used for tax purposes.
• B) Estimates are used.
• C) Determining worthless accounts under direct write-off method is difficult to do.
• D) Improved matching of bad debt expense with revenue.

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Definitions:

Book Value

The net value of an asset or liability according to its balance sheet account balance, taking into account the cost of the asset and accumulated depreciation.

Unrealized Gain

A profit that exists on paper resulting from an investment that has increased in value but has not yet been sold.

Commercial Substance

The notion that a transaction significantly alters the cash flows that the economic entity would otherwise expect.

Joint Venture

A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task, project, or business activity.