Your company previously averaged about 20% of its total accounts receivable in the "over 90 days past due" category and now has 35% in this category.All else equal,using the aging of accounts receivable method,the amount of the bad debt adjustment will:
A)fall,increasing the ending balance of the allowance account.
B)rise,increasing the ending balance of the allowance account.
C)fall,decreasing the ending balance of the allowance account.
D)rise,decreasing the ending balance of the allowance account.

Question

Quizplus · Accepted Answer

When the percentage of accounts in the "over 90 days past due" category increases, it indicates a higher likelihood of bad debts. Therefore, the company will need to increase the allowance for doubtful accounts to reflect this higher risk. Using the aging of accounts receivable method, the bad debt adjustment is calculated as the difference between the estimated allowance required and the previous balance in the allowance account. Since the estimated allowance required will increase due to the higher percentage of past due accounts, the bad debt adjustment will rise, increasing the ending balance of the allowance account (Choice B).

Your Company Previously Averaged About 20% of Its Total Accounts