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Basic Question 4 of 11
The Converse Corporation uses the percentage of sales revenue approach to estimate bad debts. Sales for 2015 are $600,000. The unadjusted balance in the allowance account at year-end is $6,500. Converse estimates that 2% of sales will be uncollectible. Which one of the following is the proper amount of bad debt expense to recognize at 12/31/2015?
B. $1,200
C. $12,000
A. $5,500
B. $1,200
C. $12,000
User Contributed Comments 19
| User | Comment |
|---|---|
| John1965 | The bad debt expense is just the 2% of sales. However, allowance can be changed later. |
| kalps | In P&L the bad debt expense will be shown as US$12,000, however the allowance will increase by only US$5,500. I got this wrong as well !! |
| shasha | you use "balance sheet approach" to reach the year-end allowance of $5,500, which i believe is not right in this case. instead, we should use "income statement approach", adding $12,000 bad debt provision to the UNADJUSTED balance in allowance account. |
| Ali1 | Exactly shasha. I agree. The question asks what is the proper amount of bad debt expense to RECOGNISE, not adjust from the existing bad debt expense. |
| cbb1 | Bad debt expense will be $12,000 and the allowance acount will be $18,500. |
| verter2k | why not A? 12000-6500=5500 |
| prachirp | Because it is based on the estimate only and thus 2% of 600,000 = 12000 |
| rethan | Can someone explain to me what "unadjusted balance on the allowance account at year end" is? |
| kutta2102 | I agree with verter2k - the allowance account already has a balance of $6500. 2% of $600K is $12K. Therefore, the allowance account needs to be funded with an additional $5500 which should then passed on as an expense for that period. This is how banks calculate their Loan Loss Expense as well. |
| ppjar | No, the answer is C. When calculating annual bad debt expense you should not consider the existing balance at all. |
| Drzewes | existing balance is allowance for bad debts from previous periods. |
| Spawellian | but how many periods must that balance sit there until they can justifiably determine they don't need the provision (if writeoffs<provisions)?? |
| Rob09 | A is not correct because it represents the adjustment that must be made at year end to the allowance for doubtful accounts balance...12k is the actual expense that is recognized |
| DutchNadja | bad debt 12,000 = allowance 5,500 + sales 6,500 |
| Rchan89 | wouldnt the allowance account be $12,000 not $18,500? |
| ybavly | DutchNadja is correct! The question asks for the bad debt to recognize not bad debt to adjust. |
| johntan1979 | 2% of sales = $12,000 Ignore unadjusted balance in allowance. |
| Shaan23 | When calculating bad debt expense do NOT include PAST years. thats all you need to know. |
| CJHughes | "expense to recognise"? Full expense is recognised under % of Sales. Allowance Acc was an estimate of what was expected to be recognised. |
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Learning Outcome Statements
evaluate the earnings quality of a company;
CFA® 2025 Level II Curriculum, Volume 2, Module 14.