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On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Which of the following correctly states the effect of the adjusting entry,dated December 31,Year 1,on the elements of the financial statements of the Loudoun Corporation?

A)Option A
B)Option B
C)Option C
D)Option D

Question

[The following information applies to the questions displayed below.]

On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On February 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.

-Which of the following correctly states the effect of the adjusting entry,dated December 31,Year 1,on the elements of the financial statements of the Loudoun Corporation?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

Uncollectible accounts expense = Credit sales of $112,500 × 3% = $3,375
The adjusting entry decreases assets (by increasing the allowance for doubtful accounts)and decreases stockholders' equity (retained earnings).It increases expenses (uncollectible accounts expense),which decreases net income.It does not affect the statement of cash flows.

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