BACHELOR OF BUSINESS ADMINISTRATION

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BUSINESS ADMINISTRATION

FINANCIAL ACCOUNTING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
E COMPANY adopted a new method for estimating doubtful accounts at an amount indicated by aging of accounts receivable. Allowance for doubtful accounts, January 1 250, 000Provision for doubtful accounts recorded during the year (2% of credit sales of P10, 000, 000) 200, 000Accounts written off 205, 000Uncollectible accounts per aging, December 31 220, 000What is the year-end adjustment to the allowance for doubtful accounts?
A
175, 000 debit
B
175, 000 credit
C
25, 000 debit
D
25, 000 credit
Explanation: 

Detailed explanation-1: -The amount of bad debt expense can be estimated using the accounts receivable aging method or the percentage sales method.

Detailed explanation-2: -What is the Aging Method? The aging method is used to estimate the amount of uncollectible accounts receivable. The technique is to sort receivables into time buckets (usually of 30 days each) and assign a progressively higher percentage of expected defaults to each time bucket.

Detailed explanation-3: -Method 1: Accounts receivable aging method It estimates the allowance for doubtful accounts by multiplying the accounts receivable by the appropriate percentage for the aging period and then adds those two totals together. For example: 2, 000 x 0.10 = 200. 10, 000 x 0.05 = 500.

Detailed explanation-4: -Balance Sheet Aging of Receivables Method for Calculating Bad Debt Expenses. The balance sheet aging of receivables method estimates bad debt expenses based on the balance in accounts receivable, but it also considers the uncollectible time period for each account.

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