FAR Question – Receivables – Credit Loss

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  • #3304963
    Future75
    Participant

    Need to find the total “Account receivable, net”. The questions gives the A/R: 200,000 & 5% uncollectible and Allowance for credit losses has a balance of 3,000.

    A/R: 200,000 * 5% = 10,000

    Credit loss expense (10,000 – 3,000) 7,000
    Allowance for credit losses 7,000

    Accounts receivable 200,000
    Allowance for credit losses (10,000)
    Accounts receivable, net 190,000

    Can someone explain why subtract 10,000 – 3,000 but still include the 10,000 in calculation? Thank you.

    #3304969
    RobOh
    Participant

    It would really depend on the question that is being asked.

    If the question is simply asking, What is “Net” Accounts Receivables? Then all you need to answer the question is below which gives you the answer of NET AR = $190,000:
    Current AR: $200,000
    Less Allowance for Uncollectibles: ($10,000) = 200,000 – (200,000 x 5%)
    Equals Net AR: $190,000

    There are a lot of ways to ask a question on this and the exam will ask it in many different ways, so you need to understand the journal entry. The journal entry would be the below because the balance in the Allowance for Uncollectibles account is $3,000 and it is calculated above to be $10,000. Therefore, the Allowance for Uncollectibles needs to be adjusted by $7,000.
    Debit Bad Debt Expense $7,000
    Credit Allowance for Uncollectibles $7,000 ($10,000 – $3,000)

    Another important thing to keep in mind is that the Allowance for Uncollectibles is typically a credit balance because by nature it is a contra-asset account. If not mentioned in the question, then assume it is a credit balance. However, make sure that the question does not state that there is a debit balance in the allowance account because the exam questions will sometimes include that to try and trip you up to make sure that you are paying attention to the details.

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