Question

A company uses the income statement approach to determine the required balance in the AFDA account. Sales are $10 million. Management believes that an allowance of 0.2% is required. At present, the balance of the allowance account is zero. The journal entry to set up the required allowance includes:

Select one:

a. A debit to AFDA of $20,000

b. A credit to Bad Debt expense of $20,000

c. A credit to AFDA of $20,000

d. A credit to AFDA of $1 million

Answer 1

Correct answer---------c. A credit to AFDA of $20,000.

.

In income statement approach to determine the required balance in the AFDA account. A percentage of sales is considered as bad debts expense.

The entry to record this include debit to bad debts expense and credit to AFDA.

AFDA= Allowance for doubtful accounts.