The Allowance Method for Estimating and Reporting Bad Debt Expense

question 24

Multiple Choice

The allowance method for estimating and reporting bad debt expense:

• A) Demonstrates a practical application of the full-disclosure principle.
• B) Generally recognizes gains and losses on bad debts in the period when the related account receivable is removed from the accounting records.
• C) Is optional under GAAP for all retail companies.
• D) Generally adheres to the matching principle better than the specific write-off method.

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Definitions:

Price Elasticity

The measure of how much the quantity demanded of a good responds to a change in the price of that good.

Demand Curve

A diagram that illustrates the connection between a product's cost and the amount of it consumers want to buy at various prices.

Substitution Effect

The change in the consumption pattern of goods or services due to a change in their relative prices, causing consumers to replace more expensive items with cheaper alternatives.

Income Effect

The change in the quantity demanded of a good resulting from a change in consumer income, holding prices constant.