Question

Continuing with the information presented in #1 above, ABC has ICO of $1,800,000 and a corporate tax rate of 30%. Determine if ICO should be adjusted based on the following information:

Over the past four years ABC has estimated bad debts based on 4% of accounts receivable. In 2018, after reviewing their major client's credit worthiness, they decided to change this estimate to 3%. As of December 31st, ABC reported their accounts receivable at $860,000, and the Balance Before Adjustment in the Allowance for Doubtful Accounts was $10,100 (cr).

The $1,800,000 of ICO had been calculated prior to recording Bad Debt Expense for 2018.

Adjustment for Bad Debt Expense for 2018:

Answer 1

• All working forms part of the answer
• Working:

A	Dec 31, Accounts receivables balance	$                       8,60,000.00
B	% estimated to be uncollectible	3%
C = A x B	Amount uncollectible (equals to adjusted ending balance for Allowance account)	$                           25,800.00   [860000 x 3%]
D	Unadjusted balance of Allowance for Doubtful account	$                           10,100.00
E = C - D	Adjustment required for Bad debt expense 2018	$                           15,700.00

• Answer and Journal Entry

Date	Journal	Debit	Credit
31-Dec	Bad Debt Expense	$                           15,700.00
	Allowance for Doubtful accounts		$                        15,700.00
	(adjustments for bad debt expense for 2018)