Question

AT&U Company has the following data for the year ended December 31, Year 1:

Sales (credit)	$2,500,000
Sales returns and allowances	50,000
Accounts receivable (December 31, Year 1)	640,000
Allowance for doubtful accounts
(before adjustment at December 31, Year 1)	20,000
Estimated amount of uncollected accounts based on aging analysis (December 31, Year 1)	45,000

14. Refer to AT&U Company. If the company uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense for Year 1?

	a.	$20,000
	b.	$25,000
	c.	$45,000
	d.	$65,000

Answer 1

• Requirement 14

--As per Aging of accounts, uncollectible accounts amounts to $ 45,000
--This means that Adjusted ending balance in Allowance account = $ 45,000 Credit
--Unadjusted balance existing in Allowance account = $ 20000 Credit
--Bad Debt Expense = $ 45000 credit required - $ 20000 already credit balance= $ 25,000

• Correct Answer = Option ‘B’ $ 25,000
• However, if Unadjusted balance in Allowance account is taken at $ 20000 DEBIT, then
  Correct Answer would be Option ‘D’ $ 65,000 [$45000 credit required + $ 20000 debit existing]