On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit
ID: 2571017 • Letter: O
Question
On December 31, Year 1, the Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting for uncollectible accounts. In February of Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050.
Which of the following answers correctly states the effect of recording the collection of the reestablished receivable on April 4, Year 2?
Multiple Choice
Option A
Option B
Option C
Option D
Assets = Liab. + Equity Rev. Expenses = Net Inc. Cash Flow A. NA = NA + NA NA NA = NA NA B. 1,050 = NA + 1,050 1,050 NA = 1,050 1,050 OA C. 1,050 = NA + 1,050 NA (1,050 ) = 1,050 1,050 OA D. NA = NA + NA NA NA = NA 1,050 OAExplanation / Answer
Due to reinstatement of accounts receivable the following journal entry is passed:
Accounts receivable Dr. $1050
Allowance for doubtful accounts Cr. 1050
On collection of this amount of reinstatement, the following journal entry is passed:
Cash Dr. 1050
Accounts receivable Cr. $1050
The combined effect of these two entries can be seen. There has been "zero" net effect on assets of this transaction. The operating cash flow has increased due to the cash collection.
The answer is Option D.
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