Question

The direct write-off method is required where?

1) where receivables are a large part of the current assets.
2) by GAAP.
3) for companies that factor their receivables.
4) for federal income tax purposes.

Answer 1

The direct write-off method is required for federal income tax purposes. It is not typically allowed under GAAP for financial reporting, but is sometimes mandated by the IRS for tax deductions related to uncollectable debts.

Step-by-step explanation:

The direct write-off method is a technique used in accounting for managing uncollectable accounts receivable. This method involves writing off bad debts directly to expense once they are determined to be uncollectible. Addressing the question, 'the direct write-off method is required for federal income tax purposes'. This method is not generally permitted under Generally Accepted Accounting Principles (GAAP) for reporting financial results, as it can distort financial statements by recognizing expenses in a different period from the related revenues. However, for tax purposes, the IRS sometimes requires businesses to use the direct write-off method to deduct uncollectable debts.