Question

Computing Bad Debts Under the Allowance Method Based on Receivables

A company has a credit balance of $480 in its allowance for doubtful accounts. The amount of credit sales for the period is $64,000, and the balance in accounts receivable is $12,000. Assume that the expected credit losses are estimated to be 9% of accounts receivable.

a. What is (1) bad debt expense for the year and (2) the ending balance in the allowance for doubtful accounts?

1. Bad Debt Expense $____

2. Allowance for doubtful accounts $_____

b. How would the answer to part a change (if at all) if the company had a debit balance of $480 in its allowance for doubtful accounts before any adjustment?

1. Bad Debt Expense $____

2. Allowance for doubtful accounts $_____

Answer 1

a1.

Allowance for doubtful accounts, unadjusted = $480

Credit sales = $64,000

Accounts receivable = $12,000

Percentage uncollectible = 9% of accounts receivable

Bad debt expense = (Accounts receivable x Percentage uncollectible) - Allowance for doubtful accounts, unadjusted

= (64,000 x 9%)- 480

= 5,760-480

= $5,280

1. Bad Debt Expense $5,280

a2.

Allowance for doubtful accounts = Accounts receivable x Percentage uncollectible

= 12,000 x 9%

= $1,080

2. Allowance for doubtful accounts $1,080

b1.

Allowance for doubtful accounts, unadjusted = $480 (debit)

Accounts receivable = $12,000

Percentage uncollectible = 9% of accounts receivable

Bad debt expense = (Accounts receivable x Percentage uncollectible) + Allowance for doubtful accounts, unadjusted

= (12,000 x 9%)+480

= $1,560

1. Bad Debt Expense $1,560

b2.

Allowance for doubtful accounts = Accounts receivable x Percentage uncollectible

= 12,000 x 9%

= $1,080

2. Allowance for doubtful accounts $1,080