Multiple Choice
A company reports Accounts Receivable of \$50,000 and an Allowance for Doubtful Accounts of \$2,000. What is the net accounts receivable reported on the balance sheet?
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7. Receivables and Investments
Net Accounts Receivable: Allowance for Doubtful Accounts
Multiple Choice
Which of the following is correct when bad debt expense is recorded at year-end under the allowance method?
A
Accounts Receivable is debited and Bad Debt Expense is credited.
B
Bad debt expense is debited and Allowance for Doubtful Accounts is credited.
C
Allowance for Doubtful Accounts is debited and Cash is credited.
D
Bad debt expense is credited and Accounts Receivable is debited.
Verified step by step guidance1
Understand the allowance method: The allowance method is used to estimate and record bad debts (uncollectible accounts) in advance, ensuring that expenses are matched with revenues in the same accounting period.
Identify the correct accounts involved: Under the allowance method, when bad debt expense is recorded, the 'Bad Debt Expense' account is debited to recognize the expense, and the 'Allowance for Doubtful Accounts' account is credited to create a reserve for uncollectible accounts.
Clarify why Accounts Receivable is not directly affected: The allowance method does not directly reduce Accounts Receivable when bad debt expense is recorded. Instead, it uses the 'Allowance for Doubtful Accounts' as a contra-asset account to offset Accounts Receivable indirectly.
Review the journal entry: The journal entry for recording bad debt expense under the allowance method is: Debit 'Bad Debt Expense' and Credit 'Allowance for Doubtful Accounts'. This reflects the estimated uncollectible amount without directly impacting Accounts Receivable.
Eliminate incorrect options: Analyze each option provided in the problem and eliminate those that do not align with the correct journal entry under the allowance method. For example, options involving debiting Accounts Receivable or crediting Bad Debt Expense are incorrect.
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