FAR · Select balance sheet accounts · 6 practice questions
Calculate bad debt expense from an aging schedule
Aging sets the ending allowance; bad debt expense is the adjustment needed to reach it. Follow a worked allowance rollforward, then practice finding the provision and its journal entry.
Try one first
Hint
First compute the allowance balance just before the adjusting entry (beginning allowance − write-offs + recoveries), then calculate the amount needed to reach the aging target allowance.
Answer C. Compute the allowance immediately before the year-end adjustment: beginning credit $4,000 − write-offs $13,000 + recoveries $1,000 = an $8,000 debit balance in the allowance. To get to the aging target of a $9,500 credit requires a $17,500 increase (to move from an $8,000 debit to a $9,500 credit), so Bad Debt Expense = $17,500 (Dr Bad Debt Expense $17,500; Cr Allowance for Doubtful Accounts $17,500).
Why not A: $21,500 equals the aging target ($9,500) plus net write-offs ($13,000 − $1,000 = $12,000). This incorrectly treats write-offs as additional expense to be added to the target instead of recognizing that write-offs and recoveries already altered the allowance balance that must be adjusted to the target.
Why not B: $5,500 equals the aging target ($9,500) less the beginning credit balance ($4,000). This ignores the period activity (the $13,000 write-offs and $1,000 recoveries) that changed the allowance before the adjusting entry.
Why not D: $8,000 equals net write-offs ($13,000 − $1,000 = $12,000) minus the beginning allowance ($4,000). That calculation reflects confusing net write-offs with the required adjusting entry; the correct approach is to determine the post-write-off/recovery allowance balance (an $8,000 debit) and then compute the amount needed to reach the $9,500 credit target.
Worked example
Aster Co. uses the allowance method. Its beginning allowance is a $24,000 credit. During the year, it writes off $58,000 and reinstates $17,000 of previously written-off accounts before collecting the cash. Year-end aging requires a $34,000 credit allowance. No credit loss provision has been recorded during the year. Compute the year-end provision.
| 1 | Allowance after write-offs$24,000 - $58,000 = -$34,000 | $34,000 debit |
| 2 | Allowance before adjustment-$34,000 + $17,000 = -$17,000 | $17,000 debit |
| 3 | Required provision$34,000 - (-$17,000) = $51,000 | $51,000 |
| 4 | Ending allowance-$17,000 + $51,000 = $34,000 | $34,000 credit |
The year-end provision is $51,000: debit Credit Loss Expense $51,000 and credit Allowance for Credit Losses $51,000.
Check: Shortcut: clear the $17,000 debit and create the $34,000 credit, so the provision is $17,000 + $34,000 = $51,000.
Key points
- Write-offs reduce the allowance, not current bad debt expense.
- If expense was recorded earlier, the year-end adjustment is additional expense, not the total annual expense.
- For net trade receivables, subtract the required ending allowance from gross receivables, not the provision.
How the exam traps you
- Recording the aging target as bad debt expense. Subtract the allowance balance immediately before the adjustment.
- Subtracting a debit allowance balance as though it were a credit. Add the debit balance to the target to eliminate the deficit and establish the required credit.
- Ignoring recoveries or using only the beginning allowance. Roll forward the allowance: beginning credit minus write-offs plus recoveries plus provisions already recorded.
Question 2
| Item | Amount |
|---|---|
| Company X uses the allowance method for uncollectible accounts. The following Year 2 information is available: beginning gross accounts receivable | $500,000 |
| Beginning allowance for doubtful accounts (credit) | $8,000 |
| Credit sales | $1,200,000 |
| Cash collections from customers | $1,160,000 |
| Accounts written off during Year 2 | $12,000 |
no recoveries during the year
An end-of-year aging indicates that an allowance of $16,000 is required. Which choice states the correct Year 2 bad debt expense and the amounts to present for trade receivables and the allowance on the December 31 balance sheet?Hint
First determine the allowance account balance after write-offs (beginning allowance minus write-offs), then compute the adjusting bad debt expense needed to arrive at the required ending credit balance shown by the aging.
Answer D. Ending gross accounts receivable = 500,000 + 1,200,000 - 1,160,000 - 12,000 = 528,000. Beginning allowance (credit) of 8,000 less write-offs of 12,000 produces a 4,000 debit balance; to reach the required 16,000 credit balance the bad debt expense must be 20,000 (16,000 - (-4,000)). Net realizable value = 528,000 - 16,000 = 512,000.
Why not A: Tempting because one might compute 16,000 - 8,000 = 8,000 and overlook that write-offs reduced the allowance to a 4,000 debit balance; the write-offs increase the required adjusting entry.
Why not B: Tempting because the year-end required allowance is $16,000, but this ignores the beginning allowance and the effect of the $12,000 write-offs, which produced a $4,000 debit balance that requires a larger adjusting entry.
Why not C: Tempting if a student confuses write-offs with expense and treats the $12,000 write-offs as the period's expense. Under the allowance method write-offs reduce the allowance (not expense), so an adjusting entry is still required to reach the 16,000 ending allowance.
Question 3
Hint
Separate any receivable identified as credit-impaired from the pooled aging. Apply the bucket loss rates to the pooled balances, and measure the credit-impaired receivable as its carrying amount minus expected recoverable cash flows; then sum the amounts for the total allowance.
Answer C. Measure expected credit losses for the pooled receivables using the aging rates: 300,000(0.5%) + 120,000(2%) + 50,000(8%) + 30,000(35%) = $18,400. Separately measure the credit‑impaired Customer Z loss as 20,000 − 6,000 = $14,000; total allowance = 18,400 + 14,000 = $32,400.
Why not A: $25,400 would result if Customer Z's $20,000 were incorrectly combined into the 90+ days bucket (making that bucket $50,000 at 35%), i.e., treating Z as part of the pool instead of measuring it separately.
Why not B: $18,400 equals only the pooled aging calculation. It's tempting for students who forget that a receivable identified as credit‑impaired (Customer Z) must be measured individually and included in the allowance.
Why not D: $33,900 could arise from misapplying the stated loss rates (for example using 40% instead of the stated 35% for the 90+ bucket), producing a higher pooled allowance and then adding the individually measured loss.
Question 4
Hint
Focus on whether the aging amount is the required ending allowance balance or the amount of the period's adjustment.
Answer A. Under the allowance method, the aging analysis indicates the required ending balance in the allowance for credit losses ($11,000). Mason already has a $4,000 credit balance, so it should record an additional $7,000 of bad debt expense to reach the $11,000 ending allowance. This matches expected credit losses to the period and reports receivables at net realizable value.
Why not B: This confuses the aging result (the desired ending allowance of $11,000) with the amount of the journal entry. Because the allowance already has a $4,000 credit balance, recording $11,000 of expense would overstate the allowance (ending credit balance $15,000).
Why not C: An aging estimate supports adjusting the allowance for expected losses, not immediate write-offs. Specific accounts are written off only when identifiable customers are uncollectible; an estimate of future losses requires recording bad debt expense and adjusting the allowance.
Why not D: Under current GAAP, expected credit losses on trade receivables are recognized as an estimate at the reporting date. Waiting until customers default would overstate receivables and understate expense.
Question 5
Hint
Update the allowance account for the write-offs first, then determine how much expense is needed to reach the required ending balance.
Answer A. Adjust the allowance for the write-offs first: a $9,000 beginning credit balance less $14,000 of write-offs produces a $5,000 debit (negative) balance in the allowance. To achieve the required $18,000 credit balance at year-end, Lane must record $23,000 of bad debt expense (18,000 + 5,000). This follows the allowance method to present receivables at net realizable value.
Why not B: This reflects the incorrect assumption that the required ending allowance equals the bad debt expense for the year. The actual expense equals the amount needed to move the allowance from its post-write-off balance to the required ending balance, not simply the ending balance itself.
Why not C: This error results from subtracting the beginning credit balance from the required ending balance while ignoring write-offs. Because write-offs changed the allowance during the year, the expense must restore the post-write-off position to the required ending credit balance.
Why not D: This choice comes from adding the beginning credit balance to the required ending balance instead of starting from the post-write-off balance. After write-offs the allowance was a $5,000 debit, so you need $23,000 (not $27,000) to reach an $18,000 credit.
Question 6
Hint
Focus on where the allowance needs to end, then compare that target to the account's current balance, including whether it is a debit or credit.
Answer D. The allowance must end at a $15,000 credit. Since the unadjusted balance is an $8,000 debit, Lark must both eliminate that $8,000 debit and establish the $15,000 credit, so the adjustment is $8,000 + $15,000 = $23,000. Record debit Credit Loss Expense $23,000 and credit Allowance for Credit Losses $23,000.
Why not A: Tempting because $15,000 is the desired ending balance, but the question asks for the adjusting entry. With an existing $8,000 debit, more than $15,000 is required to reach a $15,000 credit.
Why not B: This results from subtracting $8,000 from $15,000 as if the existing balance were a credit. Because the allowance currently has a debit balance, the adjustment is the sum of $8,000 and $15,000, not the difference.
Why not C: This is just the current (debit) balance that must be eliminated. The company must both remove the $8,000 debit and record an additional $15,000 credit, totaling $23,000.
Common questions
How do you calculate bad debt expense from an aging schedule?
Multiply each aging bucket by its loss rate and add the results to get the required ending allowance. Subtract the pre-adjustment allowance balance to get the provision.
Do you add or subtract a debit balance in the allowance?
Add the debit balance to the required ending credit balance. The provision must first clear the debit balance, then establish the required credit.
How do recoveries affect bad debt expense?
Reinstating a previously written-off receivable credits the allowance before cash is collected. That increase reduces the provision needed to reach the ending target.
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