[jorden_rowrow]

Foster Co. adjusted its allowance for uncollectible accounts at year-end. The general ledger balances for the accounts receivable and the related allowance account were $1,000,000 and $40,000, respectively. Foster uses the percentage-of-receivables method to estimate its allowance for uncollectible accounts. Accounts receivable were estimated to be 5% uncollectible. What amount should Foster record as an adjustment to its allowance for uncollectible accounts at year-end?

The answer is 10,000 because you would do 50,000 minus 10,000. But my question is shouldn’t the answer be 90,000 because the 50,000 represents bad debt expense and not total?

[Missy]

the $50,000 does not represent bad debt expense though and the question isn't about the expense, it is entirely about the balance sheet.

The company leaves an allowance of 5% of the A/R balance, so the allowance needs to be $50k at year end. You increase or decrease the allowance and the offset is the expense.

In this case the total allowance should be $50k. There was already $40k in there so your bad debt expense is $10k.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

Replies