Question

2. X Company has the following accounting balances at the end of the year before adjustments: Accounts receivable $ 50,000 Allowance for uncollectible accounts (1,000) Net sales 150,000 Bad debts expense 0 The company estimates that 2% of net sales will be uncollectible. After the correct adjusting entry has been made, which of the following is correct about Bad debts expense for the year and Allowance for uncollectible accounts at the end of the year? Multiple Choice Bad debts expense will be $1,000 on the income statement and Allowance for uncollectible accounts will be $(2,000) on the balance sheet. Bad debts expense will be $3,000 on the income statement and Allowance for uncollectible accounts will be $(4,000) on the balance sheet. Bad debts expense will be $2,000 on the income statement and Allowance for uncollectible accounts will be $(3,000) on the balance sheet. Bad debts expense will be $3,000 on the income statement and Allowance for uncollectible accounts will be $(2,000) on the balance sheet.

Answer 1

Answer:

The correct answer is: Bad debts expense will be $3,000 on the income statement and Allowance for uncollectible accounts will be $(4,000) on the balance sheet.

Explanation:

As the company using Percentage-of-sales method for estimating bad debt at 2% of net sales: Bad Debt recorded in the period will be Net Sales x 2% or 150,000 x 2% = $3,000.

Under the percentage-of-sales period, beginning balance of Allowance for uncollectible accounts will be ignored in defining bad debt expenses (because bad debt expenses is determined on sales occurred in the period with have little to do with the quality of Beginning Account Receivable balance); thus will the increase (Debited) in Bad Debt expenses by $3,000; Allowance for uncollectible accounts will also go up (Credit) by the same amount; making closing amount is $4,000 credited ( 3,000 incurred in the period + 1,000 beginning balance).

Answer 2

Answer:Bad debt expenses will be $2000 on the income statement and Allowance for uncollectible Accounts will be ($3000) on the balance sheet.

Explanation:

The bad debt accounts and allowance for uncollectible accounts are stated in the income and balance sheet statement respectively yearly to monitor activities on collectible debts.

A firm based on his experience determined an estimated percentage of debts outstanding for the year that are likely to go bad. If the new estimate is greater than the previous year, the difference is debited to income statement and if the new estimate is less than the previous year estimate the difference is credited to the income statement.

In the above scenario the new year estimate is greater than previous year by $ 2000 and that lead to $2000 to be debited to income statement.

The balance is made to reflect the total of the new estimate to be deducted from collectible debt and this is why ($3000) goes to the balance sheet.