An agency offers service for a fee; bad debts have historically averaged 5% of each...

The agency uses accrual accounting, meaning bad debt expense should be recognized based on the revenue earned, not the cash collected. The historical bad debt rate is 5%.

Fee revenue recorded = $1.1 million

Bad debt expense = 5% × $1,100,000 = $55,000

This matches the standard accounting treatment under FASAB SFFAS No. 1, where the expense is estimated and recognized in the same period as the related revenue.

Relevant References:

FASAB SFFAS No. 1 – Accounting for Selected Assets and Liabilities

GAAP treatment for allowance for doubtful accounts

Treasury Financial Manual – Accounts Receivable Accounting

Answer: C. $55,000