TOPIC 1: The Brown Company sells small office equipment and fixtures on credit.
ID: 2724197 • Letter: T
Question
TOPIC 1: The Brown Company sells small office equipment and fixtures on credit. Their ending balance in Accounts Receivable for 2014 was $120,000. It was expected that $5,000 of this balance would later prove to be uncollectible, so Brown set up an Allowance for Doubtful Accounts for $5,000, and declared $5,000 as Bad Debts Expense for 2014. In June of 2015, Brown determined that a $1,285 receivable owed by Molly Quinn should be written off. Discuss the impact that this June write off action will have on Brown's Net Income for 2014 and 2015, and explain your answer.
Explanation / Answer
The Brown Company has total account receivable at the end of year 204 is $120,000. Out of total account receivables has set up $5,000 for bad debt. So the entry of $5,000 is already made in the income statement of 2014 as loss.
Later it was found that one of his customer Molly Quinn’s receivable of $1,250 should be written off. Since he has already made a provision of $5,000 for bad debt, so this amount of $1,250 is already include in income statement of 2014.
So Molly Quinn’s receivable of $1,250 is not affect in 2015 income statement because the entry of bad debt has already made in term of provision of bad debt in 2014.
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