You have just received notice that a customer of yours with an Account Receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to
A) debit Bad Debt Expense and credit Allowance for Doubtful Accounts.
B) debit Bad Debt Expense and credit Accounts Receivable.
C) debit Allowance for Doubtful Accounts and credit Accounts Receivable.
D) debit Allowance for Doubtful Accounts and credit Bad Debt Expense

Question

Quizplus · Accepted Answer

The allowance method requires setting up an Allowance for Doubtful Accounts account as a contra-asset account to Accounts Receivable. When a customer goes bankrupt, their accounts receivable balance becomes uncollectible and must be written off. This is done by debiting the Allowance for Doubtful Accounts and crediting the Accounts Receivable account. Therefore, the correct entry is to debit Allowance for Doubtful Accounts and credit Accounts Receivable. Option A would be correct if it were a general adjustment to the allowance account, not specifically due to a bad debt. Option B would not reflect the fact that the customer is bankrupt and will not make any future payments. Option D is not a correct entry for this scenario.

You Have Just Received Notice That a Customer of Yours