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Analyzing Balance Sheets: practice question
At 31 December 20X6, Selby Wholesale reports gross trade receivables of $512,000 and an allowance for doubtful accounts of $22,000 before adjustment. An aging analysis of the year-end receivables indicates that 6% of the gross balance will prove uncollectible. The carrying amount at which trade receivables appear on Selby's 31 December 20X6 balance sheet is closest to:
- $481,280
- $490,000
- $512,000
Show answer and explanation
Correct answer: A
Working: Required allowance = 6% × 512,000 = 30,720; net carrying amount = 512,000 − 30,720 = 481,280.
Explanation: Receivables are reported at the amount expected to be collected, so the aging estimate sets the required allowance at 6% × 512,000 = $30,720 (recorded through an adjusting entry of 30,720 − 22,000 = $8,720 of bad debt expense), and the balance-sheet carrying amount is 512,000 − 30,720 = $481,280. The $490,000 figure deducts the stale $22,000 pre-adjustment allowance and so uses a balance the aging analysis has already superseded. The $512,000 figure reports the gross invoices and ignores that the portion expected to be uncollectible no longer represents a resource controlled by Selby.
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