Question

Herman Company has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Herman estimates that $70,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is:

a. $70,000.
b. $65,000.
c. $5,000.
d. $75,000.

Answer 1

The correct bad debt expense for Herman Company is $65,000, as the existing debit balance in Allowance for Doubtful Accounts needs to be combined with the newly estimated uncollectible receivables to find the total adjustment required.

Step-by-step explanation:

The correct bad debt expense to be reported for the year by Herman Company is $65,000. The Allowance for Doubtful Accounts already has a debit balance of $5,000, which reflects previous estimations that proved to be inaccurate since debits in this account are usually direct write-offs of accounts receivable that turn out to be uncollectible. The current estimate of uncollectible accounts is $70,000. To adjust the allowance to the new estimate, we should add the existing debit balance to the newly estimated uncollectible receivables. Therefore, the total necessary adjustment is $70,000 (new estimate) + $5,000 (existing debit balance), which equals $75,000. However, to determine the bad debt expense for the year, we only consider the increase needed from the current balance, so we subtract the existing debit balance from the total adjustment: $75,000 - $5,000 = $70,000. Thus, the company will report a bad debt expense of $70,000, and the allowance account will have a credit balance of $70,000 after the adjustment as well.