Question

During 2004, ABC Company had $750,000 of net credit sales. Accounts Receivable had a December 31, 2004, balance of $250,000.

No amounts have been added to the Allowance for Doubtful Accounts during 2004. Before adjustment on December 31, 2004, the Allowance for Doubtful Accounts had a credit balance of $2,000.
ABC estimates that 3% of net credit sales will become uncollectible.

What will be the adjusted balance in Allowance for Doubtful Accounts at December 31?
a. $22,500
b. $20,500
c. $24,500
d. $7,500

Answer 1

c. $24,500

Step-by-step explanation:

The allowance for doubtful accounts is a contra-asset account that records the amount of receivables expected to be uncollectiblea, makes a reduction of the total amount of accounts receivable appearing on a company’s balance sheet. There are two way to estimate uncollectible accounts: the percentage of sales method and the accounts receivable aging method.

ABC Company uses the percentage of sales method - application a flat percentage to the total amount of net credit sales for the period.

Estimated uncollectible = 3% x $750,000 = $22,500

The company establishes an allowance for doubtful accounts for $22,500 while simultaneously reporting $22,500 in bad debt expense.

Before adjusting on December 31, 2004, the Allowance for Doubtful Accounts had a credit balance of $2,000.

The balance in the allowance for doubtful accounts after adjustment is $22,500 + $2,000 = $24,500