- CFA Exams
- 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
Last year, Company X sold $590,000 on account. The company estimated that 3 percent of sales on account would become uncollectible. During the year the company wrote off $29,000 of uncollectible accounts receivable. What was last year's bad debt expense?
C. Neither of these answers is correct.
Explanation: 3% * $590,000 = $17,700
User Contributed Comments 10
|chamad||last year 590000*3%=17700
this year wrote off 29000
this year's portion should be 29000-17700=11300?
Can someone explain!
|oregon||the expense recognized has nothing to do with the amount written off. It is the estimated bad debt which is 590000 x 0.03.|
|NavdeepS||isnt bad debt expense account reduced by actual write offs??|
|pool||No. The expense amount is fixed. The balance of the reserve account is affected by the amount written off. You are confusing between amount recognized and amount paid.|
|cong||The other portion of the write-off comes from previous years' operations.|
|Lambo83||The $29,000 write-off for the current year is just included to throw you off and confuse you. Not actually needed as the question asks for 'last years bad debt expense'|
|praj2102||Isnt the ans wrong ? last yr's bad debt = 590000*3% = 17700 ..so last yr's is 11300|
|yuriy||the answer is correct. How much the company actually wrote off (cash based) has nothing to do with the bad debt (accrual based).|
|Ekonomiya||The answer is correct because the entry for 59, 000 x .03 will be a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for 17, 700. When writing off accounts receivables the BDE will not be affected as the entry will just be a debit to AFDA and a credit to A/R.|
|markbucfa||Just remember that the Bad Debt Expense is based on Sales, so the write off is not just related with this year's sales. If however, the BDE is based on outstanding receivables at year end, then the write off is relevant.|