[helpme!]

X Company decided that its Net Realizable Value at Dec. 31 2008, based on the aging of receivables was $550,000.

Given the information below, what is the bad debt expense for 2008?

1. accounts receivable at (Dec. 31 2008) is 600,000

2. allowance for uncollectible accounts (Jan/1/2008) is $50,000

3. uncollectible accounts written off during 2008 is $30,000

4. uncollectible accounts recovered during 2008 is $2000

What is the bad debt expense for 2008 for X Company?

[helpme!]

So, by taking the $50,000 difference between A/R and NRV, does that cancel the allowance for uncollectible accounts of $50,000 at the beginning of the year?

Then, you take the written off amount ($30,000), and then remove $2,000 from that amount for a total bad debt expense of $28,000?

[rehmanvohra]

It is not the cancellation of balance in allowance account. The balance in the account remains unchanged. The bad debts expense is $28,000

[helpme!]

Thank you for the help.

Are you saying that the balance in the allowance account and the difference between A/R and NRV are not relevant to getting 28,000 as the bad debt expense?

Or are you saying that "canceling" out is just bad terminology?

[rehmanvohra]

I just do not understand where did you get the idea of cancelling out. Actually there is no change in the opening and closing balances of allowance for doubtful debts account.

Now about the relevance part. As you know that the Accounts Receivable Account is reported at its face value and a contra account is reported to arrive at its net realizable value. That means both accounts are relevant.

The amount of $28,000 was arrived at as an expense. How did you get that figure?:
Opening balance in allowance account $50,000
Add Recovery of bad debts previously written off $2,000
Less Bad debts actually written off during the year $30,000
Balance in allowance account before adjustment $22,000

Now that we need a balance in allowance account $50,000
Less Adjusted balance in the account $22,000
Provision needed to bring the amount to desired level $28,000

Bad debts expense is reported in income statement as $28,000 and allowance account appears as a contra to accounts receivable

[helpme!]

I just do not understand where did you get the idea of cancelling out. Actually there is no change in the opening and closing balances of allowance for doubtful debts account.

Now about the relevance part. As you know that the Accounts Receivable Account is reported at its face value and a contra account is reported to arrive at its net realizable value. That means both accounts are relevant.

The amount of $28,000 was arrived at as an expense. How did you get that figure?:
Opening balance in allowance account $50,000
Add Recovery of bad debts previously written off $2,000
Less Bad debts actually written off during the year $30,000
Balance in allowance account before adjustment $22,000

Now that we need a balance in allowance account $50,000
Less Adjusted balance in the account $22,000
Provision needed to bring the amount to desired level $28,000

Bad debts expense is reported in income statement as $28,000 and allowance account appears as a contra to accounts receivable

Thanks so much. I have one FINAL question...

In bold, you started with a $50,000 "need".

Did that $50,000 come from the original $50,000 that was in the "allowance for uncollectible accounts at (1/1/2008)"?

[rehmanvohra]

Did that $50,000 come from the original $50,000 that was in the "allowance for uncollectible accounts at (1/1/2008)"?

I think you have not read the question carefully. The first line of your question states

X Company decided that its Net Realizable Value at Dec. 31 2008, based on the aging of receivables was $550,000.

Now that the accounts receivable balance is $600,000 and the NRV is $550,000, the needed balance in allowance is $50,000.

You also have assumed the same in your post at #2 above.