Question

Your company previously averaged about 20% of its total accounts receivable in the over 90 days past due category and now has 35% in this category. All else equal, using the aging of accounts receivable method, the amount of the bad debt adjustment will:

a) fall, increasing the ending balance of the allowance account
b) rise, increasing the ending balance of the allowance account
c) fall, decreasing the balance of the allowance account
d) rise, decreasing the ending balance of the allowance account

Answer 1

Option (b), The increase in accounts over 90 days past due from 20% to 35% will likely cause the bad debt adjustment to rise, increasing the balance of the allowance account, per the aging of accounts receivable method.

Step-by-step explanation:

Using the aging of accounts receivable method, the amount of the bad debt adjustment will likely rise, increasing the ending balance of the allowance account. This is because more accounts are now considered to be potentially uncollectible due to the increase in accounts that are over 90 days past due (from 20% to 35%).

The aging of accounts receivable method typically assumes that the older the receivable, the less likely it is to be collected. Therefore, if the percentage of aged receivables increases, the estimated bad debt also increases, leading to a higher allowance for doubtful accounts.