1. ABC Company applies the allowance method to value accounts receivable.

The Company
estimates its bad debts based past experience, which indicates that 1.5% of the net credit sales
will be uncollectible. Its total sales for the year ended December 31, 2015 amounted to P400,000.
After a thorough evaluation of the accounts receivable from XYZ Company amounting to
P20,000, ABC Company has decided to write off this account before year-end adjustments are
made.

Shown below are ABC Companys account balances as at December 31, 2015, before any
adjustments and the P20,000 write off.

Sales P4,000,000
Accounts receivable 1,500,000
Sales discounts 250,000
Allowance for bad debts 33,000
Sales returns and allowances 350,000
Bad debt expense 0

ABC Company has decided to value its accounts receivable using the balance sheet
approach as suggested by its external auditors. Presented below is the aging of accounts
receivable subsidiary ledger amounts as at December 31, 2015.

Less than 61 90 91 120 Over 120

Account Balance 60 days days days days
DEF Company P100,000 P100,000
GHI Company 256,000 180,000 P76,000
KLM Company 654,000 500,000 154,000
NOP Company 50,000 P50,000
QRS Company 420,000 P420,000
Total P1,480,000 P780,000 P230,000 P420,000 P50,000

% Collectible 99% 95% 85% 60%

The final entry to adjust the allowance for bad debts account is:

A. Bad debt expense P44,300

Allowance for bad P44,300
debts
B. Bad debt expense P45,000
Allowance for bad P45,000
debts
C Bad debt expense P24,300
.
Allowance for bad P24,300
debts
D. Allowance for bad debts P24,300
Bad debt expense P24,300

Answer and Solution: A

 Bad debt expense P44,300
Allowance for bad debts P44,30
0

Age A/R Balance Rate Amount

Less than 60 days P780,000 1% P 7,800
61-90 days 230,000 5% 11,500
91-120 days 420,000 15% 63,000
Over 120 days 50,000 40% 20,000
Required 102,00
allowance 0
Allowance balance (P33,000 + P45,000 P20,000) 58,000
Adjustment increase in allowance P44,300