Question

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000. What is the total amount of risk of accounting loss related to Butler's trade accounts receivable, and what amount of that risk is off-balance sheet risk?A. Risk of accounting loss: $0; Off-balance sheet risk: $0B. Risk of accounting loss: $230,000; Off-balance sheet risk: $0C. Risk of accounting loss: $230,000; Off-balance sheet risk: $20,000D. Risk of accounting loss: $250,000; Off-balance sheet risk: $20,000

Answer 1

Answer:

B. Risk of accounting loss: $230,000; Off-balance sheet risk: $0

Explanation:

Accounting loss occurs due to credit provided and the market risk associated with it, already the company has provided for $20,000 un-collectible debts, now the company can have maximum of $250,000 - $20,000 = $230,000 of loss.

Talking about off-balance sheet loss, it will be zero, as off-balance sheet loss occurs only when there is some statutory or non-statutory obligation attached to any of the assets, which is not stated in accounts. Since no obligation is attached for receiving such amount from accounts receivables.

Thus, correct answer is

B. Risk of accounting loss: $230,000; Off-balance sheet risk: $0