The unadjusted balance of the allowance for doubtful accounts of Johnstone Supplies, Inc., is a credit balance in the amount of $28,947 on July 31, 2011. Based on the accounts receivable aging report, bad debt expense will be:
A) $34,012.
B) $5,065.
C) $62,959.
D) $50,434.

Question

Quizplus · Accepted Answer

The unadjusted balance of the allowance for doubtful accounts is a credit balance of $28,947, which means there were previously estimates of uncollectible accounts that have not been needed. To determine the required bad debt expense, we need to compare the aging of accounts receivable to the balance in the allowance account.

Since the question does not provide the aging of accounts receivable, the answer can be found by looking at the change needed in the allowance account. We can use the formula:

Required adjustment to allowance = Target balance in allowance – Current balance in allowance

The target balance in allowance is determined by applying a percentage to the total accounts receivable balance. The percentage used should be based on historical experience and current economic conditions. The question does not provide information on what percentage should be used, so we cannot calculate the target balance in allowance. Therefore, we cannot determine the required adjustment to the allowance account.

However, we can calculate the maximum amount that bad debt expense can be without causing a debit balance in the allowance account. This maximum amount can be calculated as:

Maximum bad debt expense = Current balance in allowance + Accounts written off – Target balance in allowance

Since we do not have information on accounts written off or the target balance in allowance, we cannot calculate the maximum bad debt expense. However, we can determine the amount of bad debt expense that would cause the allowance account to have a zero balance:

Bad debt expense for a zero balance = Current balance in allowance + Accounts written off

Assuming there are no write-offs and the allowance account should have a zero balance, then the required bad debt expense would be $28,947. To decrease the balance in the allowance account requires a decrease in a credit or increase in a debit. The amount needed to neutralize the credit balance of $28,947 would be $28,947 from bad debt expense.

Therefore, Option B, $5,065, is the best choice since only $5,065 needs to be added to the allowance account to reach the zero balance.

The Unadjusted Balance of the Allowance for Doubtful Accounts of Johnstone