Question

If RedGrass Inc. had a credit balance of $16,000 in its Allowance for Doubtful Accounts, what does this indicate?

A) There are no doubtful accounts.
B) The company owes $16,000 to its customers.
C) The company has overestimated its bad debt reserve.
D) The company has underestimated its bad debt reserve.

Answer 1

A credit balance of $16,000 in the Allowance for Doubtful Accounts indicates that RedGrass Inc. has overestimated its bad debt reserve.

Step-by-step explanation:

If RedGrass Inc. had a credit balance of $16,000 in its Allowance for Doubtful Accounts, this indicates that the company has overestimated its bad debt reserve. The Allowance for Doubtful Accounts is a contra-asset account that represents the amount of accounts receivable that are estimated to be uncollectible. A credit balance suggests that the company has set aside more funds than necessary to cover potential bad debts.