Question

During 2024, its first year of operations, pave construction provides services on account of $160,000. by the end of 2024, cash collections on these accounts total $110,000. pave estimates that 25% of the uncollected accounts will be uncollectible. in 2025, the company writes off uncollectible accounts of $10,000.

a. Determine bad debt expense for the year ended December 31, 2024.
b. Determine the financial statement effects of the write-offs in 2025.

Answer 1

The bad debt expense for Pave Construction in 2024 is $12,500, calculated as 25% of the uncollected $50,000 accounts receivable. In 2025, the write-off of $10,000 impacts the balance sheet accounts but has no effect on the income statement or cash flow.

Step-by-step explanation:

To calculate the bad debt expense for Pave Construction in 2024, we first determine the amount of accounts receivable that is expected to be uncollectible. The company provided services on account for $160,000 and collected $110,000 in cash. Thus, the uncollected accounts receivable amount to $50,000 ($160,000 - $110,000). Pave estimates that 25% of the uncollected accounts will be uncollectible, which amounts to $12,500 ($50,000 * 25%). Therefore, the bad debt expense for 2024 is $12,500.

In 2025, when Pave writes off uncollectible accounts worth $10,000, this does not affect the income statement as the expense has already been recognized in 2024. However, it reduces both the accounts receivable and the allowance for doubtful accounts on the balance sheet by $10,000 each. There is no impact on cash flow since these amounts had never been collected.