Test:CPA Financial Accounting and Reporting (FAR)

1.

The Wells Corporation ends Year 4 with accounts receivable of $540,000 and credit sales for the year of $1.3 million. The ending balance in allowance for doubtful accounts is a $5,000 debit balance as a result of accounts being written off during the year. The company has a choice between estimating bad debts as 4% of outstanding receivables or 3% of current sales. Which of the following statements is true?

If the percentage-of-sales method is elected, net income will be $17,400 less than under the ending receivables method

If the percentage-of-sales method is elected, net income will be $12,400 less than under the ending receivables method

If the percentage-of-sales method is elected, net income will be $34,600 higher than under the ending receivables method

Bad debt expense will be the same under either method

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