Question

McGlone Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of $40,000. During 2020, it wrote off $28,000 of accounts and collected $8,400 on accounts previously written off. The balance in Accounts Receivable was $800,000 at 1/1 and $960,000 at 12/31. At 12/31/20, McGlone estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for Doubtful Accounts at 12/31/20?

Answer 1

McGlone should report $48,000 (5% x $960,000) as its Allowance for Doubtful Accounts at 12/31/20 by recognizing bad debt expense of $27,600.

Debit Bad debt expense $27,600

Credit Allowance for Doubtful Accounts $27,600

(To recognize bad debt expense for the year)

Step-by-step explanation:

The following required journals are necessary to reconcile the balance in Allowance for Doubtful Accounts:

Debit Allowance for Doubtful Accounts $28,000

Credit Accounts Receivable $28,000

(To recognize write-off on accounts)

Debit Accounts Receivable $8,400

Credit Allowance for Doubtful Accounts $8,400

(Recognition of accounts receivable previously written off)

Debit Cash $8,400

Credit Accounts Receivable $8,400

(Recognition of cash collection on accounts receivable previously written off)

• Based on the adjustments above, the Allowance for Doubtful Accounts would be: Opening balance - Write-off + Reinstated written-off amount, that is: $40,000 - $28,000 + $8,400 = $20,400

• Since McGlone estimates 5% of accounts receivable as uncollectible, 5% of $960,000 is $48,000. Therefore, bad debt expense (addition to the allowance account) would be $27,600 ($48,000 - $20,400).