Under which method of determining the Allowance for Uncollectible Accounts do we adjust for the beginning Allowance balance in order to determine the Bad Debt Expense for the period?
a) The percentage of Sales method
b) We do not adjust for the beginning Allowance balance when using either method.
c) We adjust for the beginning balance when using both methods
d) The aging of Receivables method
Correct answer-------------d) The aging of Receivables method
.
The beginning balance is adjusted for calculating bad debts expense in ageing of receivable method.
In Percentage of sales method no adjustment is done for beginning balance. The bad debts is equal to estimated % of sales considered doubtful.
Following is an example of ageing of allowance method
| Accounts receivables | x | Percent Uncollectable (%) | = | Estimated Uncollectable | |
| Current | $ 500,000.00 | x | 3.00% | = | $ 15,000.00 |
| 1 to 60 days due | $ 300,000.00 | x | 10.00% | = | $ 30,000.00 |
| 61 to 90 days due | $ 200,000.00 | x | 15.00% | = | $ 30,000.00 |
| 91 and up | $ 50,000.00 | x | 20.00% | = | $ 10,000.00 |
| Estimated balance of allowance for doubtful accounts | $ 85,000.00 | ||||
..
| Estimated balance of allowance for uncollectables | $ 85,000.00 | Cr |
| Balance in Allowance for uncollectable account (Cr) | $ 23,000.00 | Cr |
| Total bad debts to be recorded | $ 62,000.00 | Cr |
.
| Transaction | General Journal | Debit | Credit |
| 1 | Bad debts expense | $ 62,000.00 | |
| Allowance for doubtful accounts | $ 62,000.00 | ||
| (To record bad debts expense) |
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