Ace Computing Company
On January 1, Year 1, the accounts receivable and the allowance for doubtful accounts carried balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were receivables of $500 written off as uncollected in Year 1. Cash collections of receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.
-Refer to the figure Ace Computing Company.What will be the impact of the entry required to recognize the bad debts expense for Year 1?

Question

Quizplus · Accepted Answer

The entry to recognize bad debts expense for Year 1 will increase the allowance for doubtful accounts (a contra-asset account) and decrease retained earnings (through the bad debts expense). This results in a decrease in total assets (since the net accounts receivable is reduced) and a decrease in retained earnings (due to the expense reducing net income).

Ace Computing Company on January 1, Year 1, the Accounts Receivable and the Receivable