Question

Hi! Please EXPLAIN THE DIFFERENCE BETWEEN THESE PROBLEMS BECAUSE THEY ARE THE SAME QUESTION BUT THE ANSWERS ARE DIFFERENT. PLEASE POST JOURNAL ENTRIES AND T-ACCOUNTS WITH AN IN-DEPTH EXPLANATION.

THANKS!

91. Brown Company's account balances at December 31, 2014 for Accounts Receivable and the related Allowance for Doubtful Accounts are $920,000 debit and $1,400 credit, respectively. From an aging of accounts receivable, it is estimated that $23,000 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for

a. $23,000.

            b.   $24,400.

            c.   $21,600. (CORRECT ANSWER)

            d.   $1,400.

92. Chen Company's account balances at December 31, 2014 for Accounts Receivable and the Allowance for Doubtful Accounts are $480,000 debit and $900 credit. Sales during 2014 were $1,650,000. It is estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for

            a.   $17,400.

           b.   $16,500. (CORRECT ANSWER)

            c.   $15,600.

            d.   $4,800.

Answer 1

Answer

• The issue that you asked tends to be confusing for many BUT its rather very simple.
• Please note that the two questions are not THAT ‘same’ (as you have mentioned). There is a minor difference.
• You know that in both the questions, Allowance method is used. Now, for Allowance method you need to know following points:

--Allowance method usage leads to creation of a separate contra asset account namely ‘Allowance for Doubtful Account’ which has a normal ‘credit’ balance.
--Bad Debt Expense is calculated (under allowance method) using two ways:
#1: Where Bad Debt Expense = Percentage of Credit Sale. Here, no concern is given to existing balance in ‘Allowance account’. Bad Debts expense is debited by the amount which equals to a certain percentage of Credit Sale, like 1 % of Sale. Question #92 falls under this category.

#2: Where Bad Debt Expense = Difference between Adjusted balance of Allowance account “required” and Unadjusted balance of Allowance account existing. Here, first we calculate what should be the ‘adjusted’ credit balance of allowance account and then adjust Allowance account accordingly. This ‘adjusted’ credit balance of account can be calculated using aging of receivables. Question #91 falls under this category.

• Now, lets take each question 1 by 1.
• Question #91

--Falls under way #2 mentioned above.
--Unadjusted balance of Allowance account = $ 1,400 Credit
--Adjusted balance of Allowance account required = Estimated uncollectible account = $ 23,000 Credit.
--See, Allowance account must have a credit balance equal to $ 23,000 while it actual has $ 1,400 Credit balance.
--This means that the said account needs to be CREDITED more.
--Allowance account need to be credited more by $ 21,600 [$23,000 - $ 1400]

--That’s why answer is Option ‘C’

• Question #92
  --More simple than #91
  --Falls under way #1 mentioned above.
  --No consideration is given to balances of Allowance account or account receivable account.
  --Bad Debt Expense = 1% of $ 1,650,000 sales = 1650000 x 1% = $ 16,500
  --Bad Debt Expense will be Debited by $ 16,500
  --Which account will be credited then? YES, the Allowance account.
  --Hence, allowance account will be credited by $ 16,500
  --That’s why answer is Option ‘B’ $ 16,500