Question
In: Accounting
Assets = Liab. + Equity Rev. − Expenses = Net Inc. Cash Flow A. (3,375 )...
| Assets | = | Liab. | + | Equity | Rev. | − | Expenses | = | Net Inc. | Cash Flow | ||||||||
| A. | (3,375 | ) | = | 3,375 | + | NA | NA | − | NA | = | NA | NA | ||||||
| B. | (3,375 | ) | = | NA | + | (3,375 | ) | NA | − | 3,375 | = | (3,375 | ) | NA | ||||
| C. | 3,375 | = | NA | + | 3,375 | NA | − | (3,375 | ) | = | 3,375 | 3,375 | OA | |||||
| D. | NA | = | NA | + | NA | NA | − | NA | = | NA | NA | |||||||
On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting for uncollectible accounts. In February of Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050. Which of the following answers correctly states the effect of the December 31, Year 1 adjusting entry for uncollectible accounts on the financial statements of the Loudoun Corporation?
Solutions
Expert Solution
- In Year 1, On Dec 31: Bad Debt Expense are to be recorded.
Bad Debt expense = $ 112,500 credit sale x 3%= $ 3,375
- Entry to record above bad debt expense
|
Bad Debt expense |
$ 3,375.00 |
|
|
Allowance for Doubtful Account |
$ 3,375.00 |
- Effect of above:
--The above entry will Increase expense (Bad Debt expense) on Income Statement by $ 3,375.
--This will also increase balance of Allowance account by $ 3,375 which is a contra asset account and reduces the Accounts Receivables balance on Assets.
--Hence, to summarise: Asset will decrease, Expense will increase and hence Equity will decrease.
- Correct Answer = Option ‘B’
|
Assets |
= |
Liab. |
+ |
Equity |
Rev. |
− |
Expenses |
= |
Net Inc. |
Cash Flow |
|||||||
|
B. |
(3,375 |
) |
= |
NA |
+ |
(3,375 |
) |
NA |
− |
3,375 |
= |
(3,375 |
) |
NA |
|||
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