Chapter 9, Problem 1MCQ

A company’s Accounts Receivable balance at its December 31 year-end is $125,650, and its Allowance for Doubtful Accounts has a credit balance of $328 before year-end adjustment. Its net sales are $572,300. It estimates that 4% of outstanding accounts receivable are uncollectible. What amount of bad debts expense is recorded at December 31?

1. a. $5,354
2. b. $328
3. c. $5,026
4. d. $4,698
5. e. $34,338

To determine

Identify the amount of bad debt expense that would be recorded at December 31.

Answer to Problem 1MCQ

The bad debt expense is recorded at December 31 is $4,698.

Explanation of Solution

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Percentage-of-receivables basis:

It is a method of estimating the bad debts (loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of receivables for a specific period. Under this method, the estimated bad debts would be treated as a target allowance balance.   

Identify the amount of bad debt expense that would be recorded at December 31.

$\begin{array}{c}\text{Bad debt expense = }\left[\begin{array}{l}\text{Total estimated uncollectibles under}\\ \text{the percentage-of-receivables basis}-\text{Credit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ =\left[\left(\text{Accounts receivable}\times 4\text{\%}\right)-\$328\right]\\ =\left[\left(\$125,650\times 4\%\right)-\$328\right]\\ =\$5,026-\$328\end{array}$

$\text{Bad debt expense = \$4,698}$

Normal balance of allowance for doubtful accounts (contra asset account) is credit balance. It is given that the Company’s unadjusted balance in Allowance for doubtful accounts is a credit of $328. Determined estimated uncollectible receivable is $5,026. Hence, to bring the allowance for doubtful account balance from a credit of $328 to credit of $5,026, bad debt expense must be recognized and increased by $4,698, and allowance for doubtful accounts must be increased by $4,698.

Therefore, the correct answer is option d. $4,698.