Question

Wheeling Inc. uses the aging of accounts receivable method. It estimates 5% of its year-end balance of Accounts Receivable is $100,000 to be uncollectible, and the unadjusted debit balance of the Allowance for Doubtful Accounts is $500. Credit sales during the year totaled $150,000. What is the estimated Bad Debt Expense for the current year?

Answer 1

The question says that 5% of the year end balance of Accounts Receivable to be uncollectible.

The Accounts Receivable balance given is $ 100,000.

Now during the year credit sales are of $ 150,000.

The wordings of the question are not clear.

However, assuming the Accounts Receivable Balance of $ 100,000 to be opening balance and credit sales of $ 150,000 to be added, the closing balance would be $ 250,000.

Hence uncollectible amount will be

= 5% of $ 250,000 = $ 12,500

The above expense will be hit to Profit and Loss account. However, the allowance for bad debts has a debit balance of $ 500. This balance will be adjusted against the uncollectible amount of $ 12,500.

Hence, net uncollectible amount will be

= 12,500 - 500 = $ 12,000.

Hence bad debt expense during the year will be $ 12,000.

If, $ 100,000 is assumed to be closing balance then uncollectible amount will be 5% of $ 100,000 = $ 5,000.

Bad debt expense will be

= $ 5,000 - $ 500 = $ 4,500.

Bad debt is that amount which is assumed to be not get collected and hence a loss to the company. This expense will get debited to Profit and Loss account which ultimately will reduce the profit of the company.