[CPA!!!]

I am so utterly confused!
Doing MCQ via Ninja and this question comes up:

On January 1, Jam Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2% of Jam’s accounts receivable have been uncollectible. During the year, Jam wrote off $325,000 of uncollectible accounts. Accounts Receivable at the end of the year was $9,000,000. In its December 31 year-end balance sheet, what amount should Jam report as an allowance for uncollectible accounts?

A. 180
B. 115
C. 245
D. 440

Answer A. 180

Now it didn’t make sense why it would be 180 so I googled to try to see if I can find an explanation and anywhere I check the answer is B 115 not A. Why the heck are the answers different?

Here’s a link to the same question posted here back in 2015

https://www.another71.com/cpa-exam-forum/forum/far-cpa-exam-prep-test-day-experience/financial-accounting-reporting/topic/when-to-consider-credit-balance-in-doubtfuluncollectible-accounts/

[monikernc]

This is an Ask Jeff question.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[RobOh]

The answer of $180,000 looks correct to me. The question is asking what the allowance for doubtful accounts is at the end of the year, 12/31.

12/31 AR Balance of $9,000,000 x 2% = $180,000

[RobOh]

The other question must have been referring to using the Percentage of Sales Method. In this case, it would be an income statement approach instead of balance sheet approach. It's important to ask yourself before answering these questions on Allowance for Doubtful Accounts is if the question is asking for % of AR, Aging of Receivables, or % of Sales Method.

Percentage of Sales Method:
Beginning Balance of $260,000 – Write-offs of $325,000 = Debit Balance in the Allowance Account of $65

End of Year Bad Debt Journal Entry: 2% x $9,000,000 Sales = $180,000

(260,000) Beginning Credit Balance
325,000 Write offs for uncollectible accounts
———-
65,000
(180,000) Above entry for 2% of $9,000,0000
———-
(115,000) Balance of Allowance for Uncollectible Accounts if using Percentage of Sales Method.

Always remember to read the question carefully which is why it's so important to practice practice practice doing the MCQ's.

[CPA!!!]

But wouldn’t it be the other way around? In my question the percentage of uncollectible is of AR. That would make it the percentage of AR method correct? And if that’s it then wouldn’t the answer be 245? Debit of 65 (-260+325) and we would need to credit 245 to get to -180

[CPAHOPE]

I use wiley for my cpa studies and yes i did find maybe 1 or 2 errors on the books. The answer should be 115k. If the question was to ask what is the bad debt expense, then the answer would be 180k. I created a t account for allowance to solve.

B. 260k + 180k (bad debt expense) – 325k (W/O) = 115k

[RobOh]

@CPA!!! Yes, the question posted above is the Percentage of AR Method. I was just showing you how the other answer for % of Sales came out to $115,000.

@CPAHOPE When I was studying a few years ago Wiley had many mistakes that would frustrate the heck out of me to the point that I had switched to Becker. That was my personal experience back then.

I wish I could do a T account on here but that would be difficult, so I will share the journal entries with you guys for the % of AR Method.

Journal entry to record the Write-off of uncollectibles:
Debit to Allowance for Uncollectible Accounts: $325,000
Credit to Accounts Receivable: $325,000

Therefore, the Credit Balance in the Allowance for Doubtful Accounts of $260,000 at the beginning of the year would change to a Debit Balance of $65,0000.

At the end of the year you would estimate the uncollectibles:
2% x 9,000,000 = $180,000 This is the credit balance that you estimate the Allowance for Uncollectible Accounts to be at the end of the year. The allowance for doubtful accounts is a debit balance of $65,000 after the write-off, so you would need to credit it $245,000 to get a credit balance in the allowance account of $180,000.

Journal entry to make the Allowance account a credit balance of $180,000:
Debit to Bad Debt Expense: $245,000
Credit to Allowance for Doubtful Accounts: $245,000

However, you don't need to do any of the journal entries to answer the question that they are asking. The question is asking what the balance should be at the end of the year for the Allowance for Uncollectible Accounts. All you need to do to answer the question is a simple calculation: 2% x $9,000,000 = $180,000.

[CPA!!!]

@RobOH thank you! now that makes sense

[RobOh]

No problem, good luck with the rest of your studies. This is a great forum to come to for CPA support.

[Author]

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