Question

Sheridan Company had a 1/1/17 balance in the Allowance for Doubtful Accounts of $31000. During 2017, it wrote off $22200 of accounts and collected $6480 on accounts previously written off. The balance in Accounts Receivable was $640000 at 1/1 and $740000 at 12/31. At 12/31/17, Smithson estimates that 5% of accounts receivable will prove to be uncollectible. What is the Bad Debt Expense for 2017?

1) $6000
2) $21720
3) $28200
4) $37000

Answer 1

The Bad Debt Expense for Sheridan Company for the year 2017 is $21,720, calculated by adjusting the initial allowance for doubtful accounts with write-offs and recoveries and then comparing it to the year-end estimated allowance based on the accounts receivable.

Step-by-step explanation:

To calculate the Bad Debt Expense for 2017, we must first determine the necessary adjustments to the Allowance for Doubtful Accounts. We start by considering the beginning balance of the allowance, the amounts written off, the recoveries, and the company's year-end estimate of the allowance based on the given accounts receivable figures.

Initial Allowance for Doubtful Accounts: $31,000

Amount Written Off: $22,200

Recoveries (amounts collected on previously written-off accounts): $6,480

The net change to the allowance from write-offs and recoveries is $22,200 - $6,480 = $15,720. Now, subtract this net change from the initial allowance to find the adjusted balance before year-end estimation: $31,000 - $15,720 = $15,280.

Sheridan Company then estimates that 5% of year-end Accounts Receivable will be uncollectible. Thus, the desired ending balance in the allowance is 5% of $740,000 = $37,000.

To find the Bad Debt Expense, we compare the adjusted balance before year-end estimation to the desired ending balance: $37,000 (desired ending balance) - $15,280 (adjusted balance) = $21,720. Therefore, the Bad Debt Expense for 2017 is $21,720.