Question

Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31 and sales on credit during the year of $6.4 million. There is also a debit balance of $3,000 in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?

Answer 1

Answer:

$61,000 Cr.

Explanation:

There are two views to this answer:

First, where year end balance of allowance will be 1% of net credit sales.

Provided credit sales for the period = $6.4 million

Non-collectible amount = 1% of net credit sales.

Therefore at the year end balance for un-collectible allowance for doubtful debts shall be $6.4 million $\times$ 1% = $64,000

Since balance is debit of $3,000

Entry shall be of $64,000 + $3,000 = $67,000 credit against bad debt expense account.

After year end adjustment entry of $67,000

Bad Debt Expense Account Dr.                $67,000

       To Allowance For Doubtful Debts                      $67,000

Balance of allowance for doubtful debts = $3,000 Dr + $67,000 Cr = $64,000 Cr.

Second view,

In this view we have the expense for the year to be $64,000 that is 1% of $6.4 million of sales.

Therefore, entry will be

Bad Debt Expense Account Dr.                     $64,000

        To Allowance for doubtful debts A/c                  $64,000

Expense for current year recorded.

After this year end balance for allowance = $64,000 Cr - $3,000 Dr. = $61,000 Cr.

Since second view is more logical, it will be considered as the expense for the year shall be limited to 1% of sales = $64,000.

Thus, Final Answer = $61,000 Cr.

Answer 2

Answer:

The balance in the allowance for doubtful accounts of Wellington Corp after the year-end adjustment to record bad debt expense will be:

$12,700.

Explanation:

First of all, we need to find out the formula to calculate this and then do the proper operations. The formula is total outstanding out less than the percentage of uncollectible accounts. So, we need to locate our numbers. First, our total outstanding shares are 1.27 million. Our next step is to find out the percentage of net uncollectible sales, that figure is 1%. So we multiply 1,270,000 per .01 and we obtain 12,700.