Question

On January 1, Putnam Wholesale Company's Allowance for Doubtful Accounts had a credit balance of $21,000. During the year, it had net credit sales of $900,000 and it had $20,000 of uncollectible accounts receivable that were written off. Past experience indicates that the allowance should be 6% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 is $200,000, what is the required credit adjustment to the Allowance for Doubtful Accounts at December 31?

1) $20,000
2) $19,000
3) $11,000
4) $12,000

Answer 1

To determine the required credit adjustment to the Allowance for Doubtful Accounts at December 31, calculate the desired ending balance of the allowance based on the percentage-of-receivables basis. Compare the desired ending balance with the beginning balance to determine the required credit adjustment.

Step-by-step explanation:

To determine the required credit adjustment to the Allowance for Doubtful Accounts at December 31, we need to calculate the desired ending balance of the allowance. Based on the past experience, the allowance should be 6% of the balance in receivables. The accounts receivable balance at December 31 is $200,000, so the desired ending balance of the allowance would be $12,000 ($200,000 * 6%).

Given that the Allowance for Doubtful Accounts had a credit balance of $21,000 at the beginning of the year, there needs to be a credit adjustment of $9,000 ($12,000 - $21,000) to reach the desired ending balance.

Therefore, the required credit adjustment to the Allowance for Doubtful Accounts at December 31 is $9,000, which is option 4) $12,000.