Kimble Corporation does not record an estimate for the amount of revenues that may be uncollectible. What effect will this omission have on the company’s net income and labilities. NI Liabilities A. No effect/No effect B. No effect/Overstate C. Overstate/No Effect D. Overstate/Overstate The answer is C. When they say uncollectible revenue are they referencing bad debt expense which would lower NI. Can someone expand upon this? thanks
This account is contra-asset, right? So no need to adjust Liabilities?
uncollectible revenue --> means you have overstated your revenues, and hence you have overstated your NI. You recognized revenue from sales to a customer that potentially could turn bad, and you may not end up recognizing the revenue. Customer went belly up and essentially would not be able to pay you. but at the time you made the sale, this was not known and you recognized the revenue on your books.
Uncollectable Revenue would fall under “Account Rec.” which is an asset account It’s not a liability…