Chapter 7, Problem 1MCQ

To determine

Accounts Receivable:

It refers to the amount that is to be received by a company for providing goods and services on credit. It is an asset account.

Bad Debts:

It refers to the amount that was expected to be received on credit sales but went uncollectible. It is a loss to the company.

To identify: The correct option for the amount of bad debts expense recorded at December 31.

Explanation of Solution

‘Option d- $4,698’ is correct.

  $\begin{array}{c}\text{Bad}\text{Debts}\text{Expense}=\left[\begin{array}{c}\left(\begin{array}{c}\text{Total}\text{Accounts}\text{Receivable}\\ \times \text{Percentage}\text{of}\text{Accounts}\text{Receivable}\text{Uncollectible}\end{array}\right)\\ -\text{Allowance}\text{for}\text{Doubtful}\text{Debts}\end{array}\right]\\ =\left[\left(\$125,650\times 4\%\right)-\$328\right]\\ =\$4,698\end{array}$

Thus, bad debts expenses recorded at December 31 are $4,698.