On December 31, 2010, Priya Co

question 75

Essay

On December 31, 2010, Priya Co. has accounts receivable of $400,000. It uses the direct write-off method of accounting for bad debts because this is what is required for determining its U.S. taxable net income. The opinion of management is that what is acceptable to the Internal Revenue System should be acceptable under generally accepted accounting procedures. However, its independent auditor disagrees with this impassioned argument and does not accept the direct write-off method of accounting for bad debts.
Present the reason(s) for the auditor's objection to the direct write-off method, and indicate the method that must be used under GAAP. Indicate how Priya's 2010 net income, current ratio, and quick ratio will be affected by following the auditor's position.