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	$58,000
Allowance for Doubtful Accounts	637	442
	$71,363	$58,098

Please explain to your client the correct amount of bad debt expense recorded for 2017 income statement.

Answer 1

the gross accounts receivable was for 2017: $72,000

the allowance for doubtful accounts is 637

the net amount recovered $71,363

hence, the entire amount of $637+amount due in 2016 is debited in the income statement as bad debt expense.

bad debts are the amount that a firm fails to recover from its customers. hence that amount is charged in the debit side of the balance sheet as a bad debt expense.

in 2016,

the gross accounts receivable was : $58,000

the allowance for doubtful accounts was : 442

amount recovered finally = $58,098

hence the amount charged as bad debt was $344 ( 442- 98)

as 98 was recovered from the provision for doubtful debts.

therefore, as per the aging method the total bad debts in 2017 will be = 344+637 = $981