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 adjustment dated December 31, Year 1, on the financial statements of the Loudoun Corporation?

Question

Quizplus · Accepted Answer

The estimated uncollectible amount of 3% of credit sales or $3,375 ($112,500 x 3%) should have been recorded as an expense and as a credit to the allowance for doubtful accounts on December 31, Year 1. This would result in a decrease in net income and total assets. Option B correctly reflects this by showing a decrease in net income and a decrease in the allowance for doubtful accounts, which also reduces the total assets. Options A, C, and D all show incorrect effects on the financial statements.

On December 31, Year 1, the Loudoun Corporation Estimated That