Question

Under the aging-of-accounts-receivable method:

a) the balance in accounts receivable prior to adjustment must be considered
b) the balance in Bad Debt Expense prior to adjustment must be considered
c) the balance in Allowance for Uncollectible Accounts prior to adjustment is ignored
d) the balance in Allowance for Uncollectible Accounts prior to adjustment must be considered

Answer 1

The correct answer is that the balance in Allowance for Uncollectible Accounts prior to adjustment must be considered when using the aging-of-accounts-receivable method. The correct option is d.

Step-by-step explanation:

Under the aging-of-accounts-receivable method, it is necessary to evaluate the balance in Allowance for Uncollectible Accounts prior to adjustment. This method involves grouping outstanding accounts receivable by their age, and then estimating the likelihood of collection based on historical data.

Companies apply higher percentages of unlikelihood to receivables as they become older, reflecting an increasing risk that they will not be collected. Contrary to one of the options provided, the correct response is that the pre-adjustment balance in Allowance for Uncollectible Accounts must be considered (d).

This is because the existing balance represents the company's current estimate of bad debts, and any adjustments will further refine this estimate. The goal is to ensure that the financial statements represent the most accurate picture of the expected realizable value of accounts receivable.

The balance in accounts receivable and Bad Debt Expense are also considered, to some extent, when determining the overall adjustment needed. However, it's the balance in the allowance account that must be specifically considered to ensure the new estimate reflects any existing reserve for bad debts. The correct option is d.