Question

As of January 1, 2021, Farley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Farley's credit sales have been uncollectible. During 2021, Farley wrote off $650,000 of accounts receivable. Credit sales for 2021 were $18,000,000. In its December 31, 2021, balance sheet, what amount should Farley report as allowance for uncollectible account

Answer 1

To determine the allowance for uncollectible accounts on Farley's December 31, 2021, balance sheet, calculate the uncollectible credit sales, subtract the written-off accounts receivable from the beginning balance, and limit the net amount to zero.

Step-by-step explanation:

To determine the amount Farley should report as allowance for uncollectible accounts on its December 31, 2021, balance sheet, we need to calculate the ending balance of the allowance.

First, we need to calculate the amount of credit sales that would be uncollectible.

From the given information, the credit sales for 2021 were $18,000,000, and based on experience, 2% of credit sales are uncollectible.

Therefore, the uncollectible credit sales for 2021 would be $18,000,000 * 2% = $360,000.

Next, we subtract the amount of accounts receivable that were written off during 2021, which is $650,000, from the beginning balance of the allowance, which is $520,000. This gives us $520,000 - $650,000 = -$130,000.

Since negative values are not allowed for an allowance for uncollectible accounts, the net amount is limited to zero.

Therefore, Farley should report $0 as the allowance for uncollectible accounts on its December 31, 2021, balance sheet.

Answer 2

$360,000

Step-by-step explanation:

Allowance for uncollectible had a credit entry of 2% of $18,000000 being the approved uncollectible allowance. Hence $360,000(2%*18000000) is charged to the account after the account has been previously debited to the tune of $520,000 to take care of a write off of $650,000.