Question

If a company uses the balance sheet approach to estimate bad debt expense, bad debt expense for a period can be determined by: Multiple Choice a.Multiplying net credit sales by the bad debt experience ratio. b.Adding the beginning balance in the allowance for uncollectible accounts to the provision for uncollectible accounts and deducting the desired ending balance in the allowance for uncollectible accounts. c.Multiplying ending accounts receivable in each age category by the expected loss ratio for each age category. d.Taking the difference between the unadjusted balance in the allowance account and the desired balance of the allowance account.

Answer 1

Answer: d. Taking the difference between the unadjusted balance in the allowance account and the desired balance of the allowance account.

Explanation: Bad debt expense is an unfortunate cost of doing business with customers on credit and recognizing bad debts leads to an offsetting reduction to accounts receivable on the balance sheet.

The balance-sheet approach for estimating bad debts expresses uncollectible accounts as a percentage of accounts receivable. That is, it takes the difference between the current balance of allowance for doubtful accounts and the amount calculated.

Therefore, if a company uses the balance sheet approach to estimate bad debt expense, bad debt expense for a period can be determined by taking the difference between the unadjusted balance in the allowance account and the desired balance of the allowance account.