Financial Accounting and Reporting-CPA Practice Exam

What amount should Simpson Co. report as allowance for uncollectible accounts after accounting for credit sales and write-offs?

1. $115,000

2. $180,000

3. $245,000

4. $440,000

The correct answer is: $115,000

To determine the appropriate amount that Simpson Co. should report as the allowance for uncollectible accounts, it's essential to understand the components that influence this account. The allowance for uncollectible accounts is established to estimate the portion of accounts receivable that may not be collected. This involves considering the total credit sales, existing receivables, past collection history, and any write-offs that have occurred. If the calculated allowance for uncollectible accounts is based on a combination of factors, such as a percentage of credit sales or aging of the accounts receivable, then arriving at an amount such as $115,000 indicates that after accounting for current credit sales and any previous write-offs, this figure is a reflection of what the company anticipates will not be collected. In contrast, the other amounts might suggest either an overestimation or underestimate of uncollectibles based on the company's credit policy and historical data. For example, an allowance of $180,000 or higher may indicate that the company expects a larger proportion of its receivables to be uncollectible than is realistically warranted by its previous experiences. Accurate accounting for uncollectible accounts is essential because it affects the financial statements; overstating the allowance can reduce net income unnecessarily, while