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 of accounting for uncollectible accounts. In February of 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 answers correctly states the effect of the December 31, Year 1 adjusting entry for uncollectible accounts on the financial statements of the Loudoun Corporation?

Question

Quizplus · Accepted Answer

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

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