Question

Skip to question [the following information applies to the questions displayed below.] At year-end December 31, Chan Company estimates its bad debts as 0.50% of its annual credit sales of $860,000. Chan records its bad debts expense for that estimate. On the following February 1, Chan decides that the $430 account of P. Park is uncollectible and writes it off as a bad debt. On June 5, Park unexpectedly pays the amount previously written off. Determine the impact of the December 31, February 1, and June 5 transactions on the accounting equation. For each transaction, indicate whether there would be an increase, decrease, or no effect, for assets, liabilities, and equity. Note: Leave no cells _________.

1. Increase in assets, decrease in liabilities, no effect on equity.
2. Decrease in assets, increase in liabilities, decrease in equity.
3. No effect on assets, increase in liabilities, increase in equity.
4. Increase in assets, no effect on liabilities, decrease in equity.

Answer 1

Chan Company's year-end bad debt estimate decreases equity with no effect on assets or liabilities. Writing off P. Park's account decreases assets with no effect on equity or liabilities. P. Park's unexpected payment increases assets with no effect on liabilities or equity since previous actions accounted for the write-off.

Step-by-step explanation:

When Chan Company estimates its bad debts expense at year-end December 31st, this would involve an increase in expenses and a corresponding increase in the allowance for doubtful accounts (contra-asset), both of which would reduce equity. The accounting equation impact would be no effect on assets, no effect on liabilities, and decrease in equity.

On February 1st, when the $430 account of P. Park is identified as uncollectible and is written off, it would decrease assets (accounts receivable) and decrease the allowance for doubtful accounts (contra-asset account), resulting in decrease in assets, no effect on liabilities, and no effect on equity.

On June 5th, when P. Park unexpectedly pays the amount previously written off, the company would reverse the write-off to reinstate the account and then recognize the payment. This results in an increase in assets (cash) and an increase in assets (accounts receivable), followed by a decrease in accounts receivable once the payment is made, with no effect on liabilities, and no effect on equity as the write-off had already been accounted for previously.