CFA Practice Question

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CFA Practice Question

The Converse Corporation uses the percentage of sales revenue approach to estimate bad debts. Sales for 2015 are $600,000. The unadjusted balance in the allowance account at year-end is $6,500. Converse estimates that 2% of sales will be uncollectible. Which one of the following is the proper amount of bad debt expense to recognize at 12/31/2015?

A. $5,500
B. $1,200
C. $12,000
Correct Answer: C

2% of $600,000 equals $12,000.

User Contributed Comments 19

User Comment
John1965 The bad debt expense is just the 2% of sales. However, allowance can be changed later.
kalps In P&L the bad debt expense will be shown as US$12,000, however the allowance will increase by only US$5,500. I got this wrong as well !!
shasha you use "balance sheet approach" to reach the year-end allowance of $5,500, which i believe is not right in this case. instead, we should use "income statement approach", adding $12,000 bad debt provision to the UNADJUSTED balance in allowance account.
Ali1 Exactly shasha. I agree. The question asks what is the proper amount of bad debt expense to RECOGNISE, not adjust from the existing bad debt expense.
cbb1 Bad debt expense will be $12,000 and the allowance acount will be $18,500.
verter2k why not A? 12000-6500=5500
prachirp Because it is based on the estimate only and thus 2% of 600,000 = 12000
rethan Can someone explain to me what "unadjusted balance on the allowance account at year end" is?
kutta2102 I agree with verter2k - the allowance account already has a balance of $6500. 2% of $600K is $12K. Therefore, the allowance account needs to be funded with an additional $5500 which should then passed on as an expense for that period. This is how banks calculate their Loan Loss Expense as well.
ppjar No, the answer is C. When calculating annual bad debt expense you should not consider the existing balance at all.
Drzewes existing balance is allowance for bad debts from previous periods.
Spawellian but how many periods must that balance sit there until they can justifiably determine they don't need the provision (if writeoffs<provisions)??
Rob09 A is not correct because it represents the adjustment that must be made at year end to the allowance for doubtful accounts balance...12k is the actual expense that is recognized
DutchNadja bad debt 12,000
= allowance 5,500 + sales 6,500
Rchan89 wouldnt the allowance account be $12,000 not $18,500?
ybavly DutchNadja is correct!
The question asks for the bad debt to recognize not bad debt to adjust.
johntan1979 2% of sales = $12,000

Ignore unadjusted balance in allowance.
Shaan23 When calculating bad debt expense do NOT include PAST years.

thats all you need to know.
CJHughes "expense to recognise"? Full expense is recognised under % of Sales. Allowance Acc was an estimate of what was expected to be recognised.
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