Question

you are an investment analyst at financial services frim. One of your clients has sent you a newspaper article on the bad debt held by Amex, one major credit card company. Your client doesn't understand what bad debt expense is . Explain you your clienthow to account for bad debt. Provide an example to your client. You can use the following example and assume that Amex uses the aging method. Consider the following accounts for Amex:

(in millions)	2017	2016
Gross A/R	&72,000	$58,540
Allowance for doubtful Accounts	637	442
	$71,363	$58,098

Assume that Amex wrote off $100 million during 2017. Please eplain to your client the correct amount of bad debt expense recorded for 2017 income statement.

Answer 1

Bad debt expense relates to amount of receivable that the entity doesnt expect to recover from the customer. In this case at the end of year 2017, Amex has made a allowance of $637 for its receivable of $ 72,000. This is an estimate that Amex expects that it will not recover $637 from its outstanding receivble.

Bad debt expense for year 2017 will be :

additional allownace created (637-442) = $195

wriiten off = $100

Net bad debt expense for the year will be $295 million