Question

The following information relates to a company’s accounts receivable: accounts receivable balance at the beginning of the year, $410,000; allowance for uncollectible accounts at the beginning of the year, $30,000 (credit balance); credit sales during the year, $1,500,000; accounts receivable written off during the year, $21,000; cash collections from customers, $1,400,000. Assuming the company estimates that future bad debts will equal 8% of the year-end balance in accounts receivable. 1. Calculate the year-end balance in the allowance for uncollectible accounts. 2. Calculate bad debt expense for the year.

1. Ending balance_____________________

2. Bad Debt balance___________________

Answer 1

Solution

Balance of Accounts Receivable and Bad Debt should be calculated as follows,

Opening Balance of Accounts Receivable	$ 410,000
Add: Credit Sales during the year	$ 1,500,000
Less: Accounts Receivable Written Off	$ (21,000)
Less: Cash Collections from Customers	$ (1,400,000)
Balance before adjusting Bad Debts	$ 489,000
Less: Bad Debt (See Notes)	$ (36,222)
Closing Balance of Accounts Receivable	$ 452,778

Notes: As Bad Debts are 8% of Closing Accounts Receivable, assuming Closing Accounts Receivable as 100, and Bad Debt as 8, Balance before adjusting Bad Debts should be (100 + 8) = 108. Therefore, Bad Debt as per Balance before adjusting Bad Debts should be [(8 / 108) * 489,000].

Therefore,

(1) Ending Balance of Allowance for Uncollectible Accounts:

Opening Balance of Allowance for Uncollectible Accounts	$ 30,000
Add: Bad Debts	$ 36,222
Less: Accounts Receivable Written Off	$ (21,000)
Closing Balance of Allowance for Uncollectible Accounts	$ 45,222

(2) Bad Debt Expense for the year = $ 36,222.