Question

Arundel Company uses percentage of sales to estimate uncollectibles.  At the end of the fiscal year, December 31, 2018, Accounts Receivable has a balance of $78,000 and had a total of $875,000 in credit sales. Arundel assumes that 1.5% of sales will eventually be uncollectible. before adjustment, the Allowance for Uncollectible Accounts had a credit balance of 4,500. What dollar amount should be credited to Allowance for Uncollectible Accounts at year end?

Answer 1

Answer is as follows:

In Percentage of Sales method : Bad Debt expense = Net Credit Sales * Estimate of Uncollectibles %

= $875000 * 1.5 % = $13125 ( charged to profit & loss a/c )

Entry : Bad debt expense A/C Dr $13125

To Allowance for Uncollectible Accounts A/C $13125

Under Percentage of Sales to estimate uncollectibles method, while calculating current year's estimated uncollectible amount, the company does not take into consideration the opening balance in Allowance for Uncollectible Accounts (either credit or debit). It debits the income statement, the current year's bad debt expense as against the current year sales revenue in accordance with matching concept.

But in Balance sheet it also takes into consideration, the opening credit balance along with current year amount.

In balance sheet:

Accounts Receivable: $ 78000

(-) Allowance for Uncollectible: $ 17625 (13125 + 4500)

Net Accounts receivable: $60375