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

When a customer goes bankrupt and is unable to make future payments, we need to write off the accounts receivable balance as uncollectible. Since we use the allowance method, we would have already recorded an allowance for doubtful accounts based on our estimate of uncollectible accounts. Therefore, the entry we make is to debit Allowance for Doubtful Accounts (to reduce the allowance balance) and credit Accounts Receivable (to write off the accounts receivable balance). This does not affect the income statement accounts like Bad Debt Expense. Hence, option C is the best choice.

You Have Just Received Notice That a Customer of Yours