Question

In 2016, Winslow Company had net credit sales of $1,250,000. On January 1, 2016, Allowance for Doubtful Accounts had a credit balance of $25,000. During 2016, $32,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $360,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016?

Answer 1

The required adjustment to the Allowance for Doubtful Accounts is a debit of $43,000, needed to reach the targeted allowance balance of 10% of receivables, which equates to $36,000 for the year-end.

Step-by-step explanation:

To calculate the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016, we must first determine the desired end balance of the allowance account using the percentage of receivables basis. With a 10% rate applied to the accounts receivable balance of $360,000, we aim for an end balance of $36,000 in the allowance for doubtful accounts. Now, considering the beginning balance was $25,000 and we wrote off $32,000 of uncollectible accounts, this reduces the allowance account to a negative balance of $7,000 (if we don’t consider any additional adjustments). To reach the desired end balance of $36,000, we must therefore adjust the allowance account by adding $43,000 ($36,000 desired end balance minus -$7,000 current balance).

The required adjustment to Allowance for Doubtful Accounts is a debit of $43,000. This will create the proper allowance balance reflecting the estimated uncollectible accounts by year-end.