On January 1, 2014 the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $30,000 and $500, respectively. During the year the company reported $75,000 of credit sales. There were $550 of receivables written-off as uncollectible in 2014. Cash collections of receivables amounted to $74,550. The company estimates that it will be unable to collect one percent (1%) of credit sales.
The entry required to recognize the uncollectible accounts expense for 2014 will
A) increase total assets and retained earnings.
B) decrease total assets and retained earnings.
C) decrease total assets and increase net income.
D) increase total assets and decrease net income.

Question

Quizplus · Accepted Answer

The entry required to recognize the uncollectible accounts expense for 2014 will decrease total assets and retained earnings. This is because the allowance for doubtful accounts, which is part of total assets, will increase by the amount of the estimated uncollectible accounts expense. The entry will also decrease retained earnings because it is an expense that reduces net income, which in turn reduces retained earnings.