Question

Before the year end adjustments, Company L's allowance for doubtful accounts balance of $7,000 (DR). The year-end balance for the allowance for the allowance for doubtful accounts will be higher if:

(A) Company L estimates that a higher percentage of accounts receivable will be uncollectible.
(B) Company L writes off more accounts receivable as uncollectible.
(C) Company L collects more accounts receivable.
(D) None of the above.

Answer 1

The year-end balance for Company L's allowance for doubtful accounts will increase if the company estimates a higher percentage of accounts receivable will be uncollectible, as this reflects a higher anticipated loss.

Step-by-step explanation:

The year-end balance for Company L's allowance for doubtful accounts will be higher if Company L estimates that a higher percentage of accounts receivable will be uncollectible. This is because adjusting the allowance for doubtful accounts is based on the estimation of potential future losses from customers who may not pay their debts, rather than the actual write-offs or collections that have occurred. When a higher percentage of accounts receivable is estimated to be uncollectible, the allowance must be increased to reflect the greater anticipated losses, thus increasing the year-end balance of the allowance account.