Question

Ariel Inc. uses the allowance method of accounting for uncollectible accounts receivable and estimates that 2% of the credit sales of $1,650,000 for the year ended will be uncollectible. Allowance for Doubtful Accounts has a negative unadjusted balance of $(1,600) at the end of the year. Determine the amount of the adjustment to record the provision for doubtful accounts.

Answer 1

1. The allowance for Doubtful account has a negative unadjusted balance of $1,600. That means it has a credit balance of $1,600.

2. Calculation of Uncollectible amount at the end of the Year:

	Amount
a. Credit sales	$1,650,000
b. Estimated percentage Credit sales to be Uncollected	2%
Estimated Uncollectible amount [a x b]	$33,000

3. Determination of amount of adjustment:

	Amount
a. Estimated Uncollectible amount at the year end	$33,000
b. Provision already created in the past	$1,600
Provision to be created at the Year end [a -c]	$31,400

Therefore, amount of the adjustment to record the provision for doubtful accounts at the year end is $31,400.

4. Journal entry at the year end for the above provision:

Date	Account Titles And Explanation	Debit	Credit
	Bad Debt Expense a/c	$31,400
	Allowance for Doubtful Accounts a/c		$31,400
	[Being Provision credted for Uncollectible amount]

Therfore, after the above journal entry, balance lying in the "Allowance for Doubtful accounts a/c" is $33,000.