Question

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n)______

a. increase in Accounts Receivable
b. decrease in Sales Revenue
c. increase in Sales Revenue
d. increase in Allowance for Doubtful Accounts
e. decrease in Accounts Receivable

Answer 1

Ophelia Inc. should record an increase in Allowance for Doubtful Accounts when they learn that their customer, Patton Inc., has filed for bankruptcy, in adherence with the allowance method for accounts receivable.

Step-by-step explanation:

When a company learns that one of its customers has filed for bankruptcy, and it has an outstanding accounts receivable balance with that customer, the action to be taken, assuming the company uses the allowance method, is to record an increase in Allowance for Doubtful Accounts.

The allowance method involves estimating and setting aside an amount for potential bad debts, which is reported as a contra asset account that reduces the total accounts receivable balance on the balance sheet. In this situation, Ophelia Inc. should adjust its allowance to reflect the increased likelihood that the debt owed by Patton Inc. will not be collected. Therefore, the correct action would be option (d) an increase in Allowance for Doubtful Accounts.