Question

The following information relates to a company’s accounts receivable:

1. Gross accounts receivable balance at the beginning of the year, $420,000;
2. Allowance for uncollectible accounts at the beginning of the year, $31,000 (credit balance);
3. Credit sales during the year, $1,550,000;
4. Accounts receivable written off during the year, $22,000;
5. Cash collections from customers, $1,600,000.

Required:
Assuming the company estimates bad debts at an amount equal to 2% of credit sales, calculate (1) bad debt expense for the year and (2) the year-end balance in the allowance for uncollectible accounts.

Answer 1

1. $31,000

2. $40,000

Step-by-step explanation:

1. Computation of bad debt expenses for the year

Bad debt expenses = Credit sales × Bad debts expenses

= $1,550,000 × 2%

= $31,000

2. Computation of year end balance

Year end balance = Beginning balance + Bad debt expense - Written off

= $31,000 + $31,000 - $22,000

= $40,000

Therefore for computing the bad debt expenses and year end balance we simply applied the above formula.