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Flashcards: Allowance Method for Doubtful Accounts

A company estimates that its bad debt expense each year will be 2% of credit sales. In the current period, one customer balance of $6,000 is determined to be uncollectible. Which of the following is true?

The write off will increase bad debt expense for the current period

The write off will reduce the net amount reported for trade receivables for the period

The write off will increase bad debt expense for the current period and reduce the allowance for doubtful accounts

The write off will reduce the allowance for doubtful accounts in the current period but not net income

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Flashcards: Allowance Method for Doubtful Accounts

Your answer:

The write off will increase bad debt expense for the current period

Your answer:

The write off will reduce the net amount reported for trade receivables for the period

Your answer:

The write off will increase bad debt expense for the current period and reduce the allowance for doubtful accounts

Correct answer:

The write off will reduce the allowance for doubtful accounts in the current period but not net income

Explanation:

When bad debt expense is based off of an estimate each year, actual accounts written off will reduce the customer balance while also reducing the allowance for doubtful accounts. Actual written off accounts have no impact on bad debt expense and therefore no impact on net income.

Flashcards: Allowance Method for Doubtful Accounts

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 $34,600 higher than under the ending receivables method

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

Bad debt expense will be the same under either method

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

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Flashcards: Allowance Method for Doubtful Accounts

Your answer:

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

Your answer:

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

Your answer:

Bad debt expense will be the same under either method

Correct answer:

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

Explanation:

If the company uses the percent of sales method, bad debt expense will be $39K ($1.3M x 3%). If it uses the ending receivables method, bad debt expense will be $26,600 ($540K x 4% + $5K debit balance). Thus under the percent of sales method, bad debt expense will be $12,400 higher and net income will be lower by that amount.

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All CPA Financial Accounting and Reporting (FAR) Resources

Flashcards: Allowance Method for Doubtful Accounts

Flashcards: Allowance Method for Doubtful Accounts

Flashcards: Allowance Method for Doubtful Accounts

Flashcards: Allowance Method for Doubtful Accounts

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