Based on the aging of its accounts receivable at December 31, Dudikoff Company determined that the net realizable value of the receivables at that date is $760,000. Additional information is as follows: Dudikoff's Bad Debt Expense for the year ended December 31 is

Question

Based on the aging of its accounts receivable at December 31, Dudikoff Company determined that the net realizable value of the receivables at that date is $760,000. Additional information is as follows:  Dudikoff's Bad Debt Expense for the year ended December 31 is

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To calculate the bad debt expense for the year ended December 31, we need to know the balance in the allowance for doubtful accounts account. We don't have that information, but we do know that the net realizable value of the receivables is $760,000.

The net realizable value of accounts receivable is calculated as:

Accounts receivable - Allowance for doubtful accounts = Net realizable value

We can rearrange this equation to solve for the allowance for doubtful accounts:

Allowance for doubtful accounts = Accounts receivable - Net realizable value

We don't know the balance in accounts receivable, but we do know that the net realizable value is $760,000. Let's assume that the balance in accounts receivable is $1,000,000.

Allowance for doubtful accounts = $1,000,000 - $760,000 = $240,000

This means that Dudikoff has set aside $240,000 to cover potential bad debts. The bad debt expense for the year can be calculated as the change in the allowance for doubtful accounts from the beginning of the year to the end of the year. We don't have the beginning balance, but we can assume that it was zero.

Bad debt expense = Ending balance in allowance for doubtful accounts - Beginning balance in allowance for doubtful accounts

Bad debt expense = $240,000 - 0 = $240,000

However, we need to adjust for the fact that the net realizable value is less than the accounts receivable balance. This means that Dudikoff may not collect some of the outstanding receivables, and we need to recognize that in the bad debt expense.

Accounts receivable - Net realizable value = Amount of bad debts

$1,000,000 - $760,000 = $240,000

The amount of bad debts is equal to the ending balance in the allowance for doubtful accounts, so we need to adjust the bad debt expense by this amount:

Bad debt expense = $240,000 - $240,000 = $0

This doesn't make sense -- it's unlikely that Dudikoff had zero bad debt expense for the year. The reason this happened is because we made an assumption about the balance in accounts receivable. If the actual balance is lower than $1,000,000, then the bad debt expense will be higher.

The correct approach is to use the aging of the accounts receivable to estimate the allowance for doubtful accounts. We don't have that information in the question, so we can't calculate the bad debt expense directly. However, we can eliminate answers A and B, since they are lower than the net realizable value of $760,000. The correct answer must be either C or D.

Answer D could be correct if the allowance for doubtful accounts is $532,000 ($760,000 net realizable value + $532,000 allowance for doubtful accounts = $1,292,000 accounts receivable).

Allowance for doubtful accounts = $532,000

Bad debt expense = Ending balance in allowance for doubtful accounts - Beginning balance in allowance for doubtful accounts

Bad debt expense = $532,000 - 0 = $532,000

This seems like a reasonable amount of bad debt expense, given the information in the question. Therefore, the best answer is:

Answer: D

Based on the Aging of Its Accounts Receivable at December