Question

Penny Cookie Company offers credit terms to its customers. At the end of Year 1, accounts receivable totaled $120,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $12,000 at the beginning of Year 1 and $6,200 in receivables were written off during the year as uncollectible. Also, $600 in cash was received in December from a customer whose account previously had been written off. The company estimates bad debts by applying a percentage of 6% to accounts receivable at the end of the year.

1. (NOT REQUIRED) Prepare journal entries to record the write-off of receivables, the collection of $600 for previously written off receivables, and the year-end adjusting entry for bad debt expense.(NOT REQUIRED)

2. (ANSWER THIS) What numbers are used to calculate the ending balance of allowance for doubtful accounts? (ANSWER THIS)

Answer 1

• You have specifically asked for Requirement 2
• Requirement 2 requires the numbers , amounts and calculation used to calculate ending balance of Allowance for doubtful accounts
• The same is given below:

Allowance for Uncollectible accounts	Year 1
Beginning balance	$                  12,000.00	It’s a credit beginning balance
Written off	$                  (6,200.00)	Accounts written off decreases the Allowance balance when Allowance account is debited.
Collected	$                        600.00	Cash received from accounts written off increase Allowance balance when these are re-instated
Unadjusted ending balance	$                    6,400.00	Total of above = Credit balance
Adjusted balance required	$                    7,200.00	$ 120,000 accounts receivables x 6% = $ 7,200
Bad Debt expense	$                        800.00	Allowance adjusted balance should be $ 7200, but its actually $ 6400 before adjustments, hence bad debt expense = 7200 – 6400 = 800