The Allowance for Doubtful Debts Currently Has a Debit Balance

question 119

Multiple Choice

The Allowance for doubtful debts currently has a debit balance of $200. The company's management estimates that 2.5% of net credit sales will be uncollectable. Net credit sales are $115 000. What will be the balance of the Allowance for doubtful debts reported on the balance sheet?

• A)$3 075
• B)$2 675
• C)$2 875
• D)$3 275

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Definitions:

Valuation Allowance

An accounting provision made to offset a portion of the deferred tax assets if it's more likely than not that some portion or all of the asset may not be realized.

Deferred Tax Asset

An accounting item that refers to a situation where a business has paid more taxes in advance than its current tax liability, or has carryover of losses that can be used to lower future tax payments.

Year-end Deferred Income Taxes

Taxes on income that is earned in one accounting period but not paid until another, resulting from timing differences between accounting recognition and the tax laws.

Net Operating Loss

A period when a company's allowable tax deductions exceed its taxable income, potentially reducing future taxable income.