- CFA Exams
- 2021 CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 5. Expense Recognition
CFA Practice Question
There are 534 practice questions for this study session.
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?
Correct Answer: C
2% of $600,000 equals $12,000.
User Contributed Comments 19
|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.|