A Company Uses the Percentage of Sales Method to Estimate

question 69

Multiple Choice

A company uses the percentage of sales method to estimate bad debt expense. Its tax rate is 30%. After issuing its 2009 financial statements, the firm discovered that it failed to write off $50,000 in receivables that were determined to be uncollectible in 2009. 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.

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Definitions:

Investment Goods

Long-term assets purchased for the purpose of generating income, growth, and/or value appreciation.

Interest Rate

The percentage charged on borrowed money, or earned through savings and investments, reflecting the cost of borrowing or the benefit of saving.

Short Run

A period in economic analysis where at least one factor of production is fixed, leading to limited adjustments in production or operation.

Long-Run Phillips Curve

A graph showing that, in the long term, there is no trade-off between inflation and unemployment, suggesting the relationship is vertical.