Question

Please do it by type not pics.

1.The Zoo Inc. sales tiny stuffed animals to Krazy Kids Co. who does not always pay for all of the animals that they buy. Krazy Kids Co.’s account is material and therefore The Zoo Inc. uses the allowance method. The Zoo Inc. sales $25,000 worth of stuffed animals to  Krazy Kids Co. At the time of sale, The Zoo Inc. determines 15% of  Krazy Kids Co. account will be uncollectible. What is the amount of the AFDA that will be record in connection with this account?

Answer 1

Allowance For Doubtful Accounts (AFDA) is maintained to ensure that balance sheet reflects the right amount of account receivables (AFDA is reduced from account receivable balance). This mechanism also attempts to ensures that the expense on account of Bad Debts is also being accounted for in the year in which the releted revenue gets accounted for (Adherence to matching principle).

As Zoo Inc. is expecting that 15% of the amount is not likely to be collected from Krazy Kids Co., AFDA account (liability account to be deducted from account receivable in the balance sheet) should be credited with $3,750 with a corresponding debit to Bad Debts Account (expense account).