Rimrock, Inc. used the aging of accounts receivable method. At December 31, management determined that the net realizable value of accounts receivable was $608,000. The balance in the Accounts Receivable asset account was $768,000 and the unadjusted credit balance in the Allowance for Doubtful Accounts contra-asset account was $32,000. "Unadjusted" in this case means Bad Debt Expense has NOT yet been recorded. Using this information, what will be the amount of Bad Debt Expense for the year?

Answer: The bad debt expense for the year is $128,000.

Explanation: Rimrock, Inc. adopts the aging of accounts receivable method. The net realizable value of the receivable is less than the carrying amount. In this case, it is $608,000 while the accounts receivable in the account was $768,000. This means the accounts receivable has suffered some impairment to the tune of $160,000 ($768,000 - $608,000) due to aging of collections. On a normal day, if there is nil balance in allowance for doubtful accounts, the same amount would be recorded as the bad debt expense for the year. Since we have a balance of $32,000 in that account, the bad debt expense for the year would therefore be $128,000 ($160,000 - $32,000), bringing the total balance in allowance for doubtful accounts to $160,000. Remember this is a contra account to the account receivable, that is, the new carrying amount of accounts receivable would be $608,000 ($768,000 - $160,000).