Question

Wellington Corp. has outstanding accounts receivable totaling $6.8 million as of December 31 and sales on credit during the year of $22 million. There is also a credit balance of $17,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year?

A) $ 561,000.
B) $ 1,760,000.
C) $ 527,000.
D) $ 544,000.

Answer 1

Wellington Corp. estimates 8% of its outstanding receivables to be uncollectible, totaling $544,000. Considering the existing allowance of $17,000, the bad debt expense for the year is calculated as $527,000. Correct answer is C) $527,000.

Step-by-step explanation:

To calculate the bad debt expense that Wellington Corp. will recognize for the year, we need to apply the percentage of expected uncollectible receivables to the total outstanding accounts receivable. According to the information provided, Wellington Corp. estimates that 8% of its outstanding receivables will be uncollectible. The outstanding receivables amount to $6.8 million. Therefore, the estimated uncollectible amount would be 0.08 * $6,800,000 = $544,000. However, we must also consider the existing credit balance in the allowance for doubtful accounts, which is $17,000.

Since there is already a credit balance, we would subtract this amount from the estimated uncollectible receivables to find the actual bad debt expense for the year. Thus, bad debt expense = $544,000 - $17,000 = $527,000. This means the correct answer is C) $527,000, which is the bad debt expense recognized for the year.