The Effect of Bad Debt Expense Topic 7

Determine the effect on a company’s Assets and net Income from the following transaction: bad debt expense is recorded by a company using the allowance method to account for bad debts.

Assets Net Income
A Decreased Decreased
B Decreased No effect
C Increased No effect
D Increased Increased
F None of the above

Calculating Bad Debts Topic 7

A company began the year with Accounts Receivable of $250,000 and a balance in Allowance for Doubtful Accounts of $11,000 (cr.). During the year, the company had credit sales of $540,000, collections on Accounts Receivable of $600,000 and wrote off $9,000 for accounts specifically identified as uncollectible. Additionally, the company collected on $2,500 of accounts previously written off during the year.

Past experience indicates that 2% of credit sales will become uncollectible.

  1. What is the ending balance in the Accounts Receivable account?
  2. What is the ending balance in the Allowance for Doubtful account after adjustment?
  1. Ending Accounts Receivable balance - 181,000
  2. Ending Allowance for Doubtful balance - 15,300

The Effect of Uncollectible Accounts Topic 7

Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account has what effect on the following accounts (indicate Increase, Decrease, or No Effect)

  1. Allowance for Doubtful Accounts
  2. Net Income
  3. Net Realizable Value of Accounts Receivable
  1. Allowance for Doubtful Accounts - Decrease
  2. Net Income - No Effect
  3. Net Realizable Value of Accounts Receivable - No Effect

Using the Balance Sheet Method Topic 7

At December 31, a company has the following balances:

Accounts Receivable 35,000 Credit Sales 60,000
Allowance for Doubtful Accounts 500 (credit) Cash 5,400

The company uses the balance sheet method to estimate bad debt. Management determined the estimate to be 3%. Under these circumstance, record the year-end adjusting entry for bad debt expense.

Journal Entry 1
Bad Debt Expense 550
Allowance for Doubtful Accounts 550