The Direct Write-Off Method

question 50

Multiple Choice

The direct write-off method:

• A)ignores the matching principle.
• B)is an acceptable alternative method of recognizing bad debt expense under GAAP.
• C)results in higher bad debt expense for most companies.
• D)may only be used by companies that do not extend credit to their customers.

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Definitions:

Annual Dividend

The total amount of dividend payments made to shareholders in a year, reflecting the company’s profitability and its distribution policy.

Coupon Rate

The annual interest payment on a bond, denoted as a percentage of its face value.

After-Tax Cost of Debt

The interest expense on debt adjusted for taxes, reflecting the actual cost to the company.

Marginal Tax Rate

The rate at which additional income is taxed, reflecting the proportion of each additional dollar of income that goes to taxes.