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Which statement correctly matches each method of recording irrecoverable debts to the type of business that uses it?
AAllowance method for firms that rarely have bad debt; direct write-off for firms that consistently have bad debt
BDirect write-off for all firms selling on credit; allowance method only for cash-only firms
CDirect write-off for firms that rarely have bad debt; allowance method for firms that consistently have bad debt
DAllowance method for cash-only firms; direct write-off for firms that never sell on credit
Answer & Solution
Correct answer: C. Direct write-off for firms that rarely have bad debt; allowance method for firms that consistently have bad debt
1. The direct write-off method suits companies that rarely experience bad debt, such as a cinema.
2. The allowance method suits companies that consistently have bad debt, such as a utility.
3. The option swapping the two methods reverses the pairing.
4. Cash-only firms have little receivables exposure, so options pinning a method to them mislabel it.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.4 "Uncollectible Accounts", p.137_
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