ExpertHard1 markMultiple Choice
CPA · Question 10 · Area II: Balance Sheet Accounts
Titan Corp. has the following account balances before year-end adjustments:<br/>- Accounts Receivable: $450,000<br/>- Allowance for Credit Losses: $15,000 (credit balance)<br/>- Credit sales for the year: $2,800,000<br/><br/>Based on an aging analysis, Titan estimates that $35,000 of accounts receivable will be uncollectible. What adjusting entry should Titan record for credit losses?
Titan Corp. has the following account balances before year-end adjustments:<br/>- Accounts Receivable: $450,000<br/>- Allowance for Credit Losses: $15,000 (credit balance)<br/>- Credit sales for the year: $2,800,000<br/><br/>Based on an aging analysis, Titan estimates that $35,000 of accounts receivable will be uncollectible. What adjusting entry should Titan record for credit losses?
Answer options:
A.
Debit Credit Loss Expense $35,000; Credit Allowance for Credit Losses $35,000
B.
Debit Credit Loss Expense $20,000; Credit Allowance for Credit Losses $20,000
C.
Debit Credit Loss Expense $50,000; Credit Allowance for Credit Losses $50,000
D.
No entry required
How to approach this question
Determine the required ending balance in the allowance account based on the aging analysis, then calculate the adjustment needed by comparing to the current balance. The adjustment equals the difference between required ending balance and current balance.
Full Answer
B.Debit Credit Loss Expense $20,000; Credit Allowance for Credit Losses $20,000✓ Correct
Under ASC 326 (current expected credit losses model), the allowance for credit losses should reflect the amount of receivables expected to be uncollectible. When using the aging method, adjust the allowance to the required ending balance. Required adjustment = $35,000 target balance - $15,000 current balance = $20,000.
Common mistakes
Recording the full estimated uncollectible amount without considering the existing allowance balance, or confusing the target balance with the adjustment amount
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