Question

The year-end adjusting entry to recognize bad debts expense will act to:

A)    increase assets and decrease equity.

B)    decrease assets and decrease equity.

C)    increase liabilities and increase equity.

D)    decrease liabilities and increase equity.

On January 1, 2017 Grant Company had a $4,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account.  During 2017, Grant provided $25,000 of service on account.  The company collected $24,000 cash from account receivable.  Bad debts are estimated to be 2% of sales on account.

The amount of bad debts expense to recognize on the 2017 income statement is:

A)    $80.

B)    $250.

C)    $480.

D)    $500.

Answer 1

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.