Question

Which of the following statements about the Allowance for Doubtful Accounts is true?

Multiple Choice

It is a contra-revenue account.

The balance in the account increases Net Accounts Receivable.

The balance in the account represents the amount of accounts receivable that the company expects to collect.

The account is credited with an estimated amount when recording bad debt expense under the allowance method.

It is an expense account.

Kelton Inc. reported net credit sales of $340,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $600. The company has experienced bad debt losses of 2% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as an estimate of Bad Debt Expense?

Multiple Choice

• $7,400

• $6,800

• $2,400

• $1,800

Answer 1

Part 1)4th Option) The account is credited with an estimated amount when recording bad debt expense under the allowance method.

Explanation:

1st Option is wrong as allowance account is a contra asset account and not contra revenue. 2nd option is wrong as balance in account will reduce net receivables. 3rd option is wrong as balance in the account represent amount that company do not expect to realize. 5th option is wrong as allowance account is contra asset account and not an expense account. 4th option is the most reasonable option as for creating allowance, bad debt expense is debited and allowance account is credited.

Part 2)2nd option)$6,800

Explanation:

Estimated bad debts=Net credit sales*2%=340000*2%=$6,800

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