Question

Vagabond Company had net sales of 8,000,000 during the current year. At year-end, before adjusting entries, the balances in selected accounts were accounts receivable 2,000,000 debit and allowance for doubtful accounts 20,000 debit. The entity estimated and 5% of accounts receivable will prove to be uncollectible, what is the net realized value of the accounts receivable at year-end?
a 2,000,000
b.1,900,000
c.1,889.000
d.1,290.000

typo its mean net realizable value

Answer 1

Ans:- The Debit balance of the allowance for doubtful accounts 20,000 is correctly adjusted to Accounts Receivable. it needs to be  treated  as prior period expense and adjusted retained earnings but wrongly debited to allowance for bad debts account . thus

the 2,000,000 is already adjusted with the 20,000. Therefore if we calculate 5% of new Provision for Doubtful debts it has to be on 2,000,000.So the new provision for doubtful debt is 100,000. The net realisable value is the net of Accounts Receivable to The Provision for Doubtful Debts. Therefore 2,000,000-100,000=1,900,000. There fore Anwer b. is the correct option.

Option A 2000,000 is wrong as it has not taken the allowance for doubt ful debt for current year .

Option c 1889000 is wrong as the amount of provision adjusted is 111000 which is not actual .

Option D is also not correct as this option assumed a allowance of 810000 which is is not 5% of 2000,000/