Question

Marmol Corporation uses the allowance method for bad debts. During year 1, Marmol charged $30,000 to bad debt expense, and wrote off $25,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of:
a. $0
b. $4,800
c. $25,200
d. $30,000

Answer 1

Answer: Option (d)

Explanation:

Under this case the write off will be as follow:

                                                                      Debit         Credit

Allowance for doubtful accounts                25,200  

Accounts receivables                                                     25,200

Here, in this case the Allowance for the doubtful accounts and Accounts receivables are further decreased as the outcome of the transaction made. Thus, there will be no further effect on working capital. Therefore the $30,000 that is bad debt would then be stated as the credit to allowance account. This will then decrease the working capital by $30,000.