Question

On December 31, Year 2 before making adjustments, the Accounts Receivable account had a $20,000 balance and the Allowance for Doubtful Accounts account had a $300 balance. If the company estimates uncollectible accounts to be 5% of accounts receivable, the amount of uncollectible accounts expense shown on the Year 2 income statement is ______.

Answer 1

To calculate uncollectible accounts expense, 5% of accounts receivable, which is $1,000, is considered. However, there's already a $300 credit in the Allowance for Doubtful Accounts. The additional expense recorded is thus $700.

Step-by-step explanation:

The student's question involves calculating the uncollectible accounts expense for the year using the percentage of sales method. On December 31, Year 2, before adjustments, the Accounts Receivable balance was $20,000 and the Allowance for Doubtful Accounts had a $300 credit balance. The company estimates that 5% of accounts receivable will be uncollectible. Thus, the uncollectible accounts expense is calculated as 5% of $20,000, which equals $1,000. Since the Allowance for Doubtful Accounts already has a credit balance of $300, we will adjust the uncollectible accounts expense to $700 to reflect the additional amount required to reach a total allowance of $1,000 after the adjustment. As a result, $700 will be reported as the uncollectible accounts expense on the Year 2 income statement.