In: Accounting
Answer 1:
Correct answer is:
B) decrease assets and decrease equity.
Explanation:
The year-end adjusting entry to recognize bad debts expense will debit 'Bad Debt expense' and credit 'Allowances for doubtful debt' account. An increase in allowance for doubtful debt will decrease 'Average Receivables' and increase in expense will reduce equity.
As such correct option is B.
Increase in expense will decrease equity. Hence options C) and D) are incorrect.
Increase in allowances will reduce net account receivables. As such increase in allowances will decrease asset. Option A is incorrect.
Answer 2:
Correct answer is:
D) $500
Explanation:
Bad debts are estimated to be 2% of sales on account. During 2017, sale of service on account = $25,000. As such bad debt = 2% * $25,000 = $500
Option D is correct.
As calculated value of bad debt as % of sales on account = $500, other options A, B and C are incorrect.