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

Question

Quizplus · Accepted Answer

Uncollectible accounts expense = Credit sales of $112,500 × 3% = $3,375
The adjustment 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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