Question

The following accounts were abstracted from Starr Co.'s unadjusted trial balance at December 31, 2014:Debit CreditAR $300,000ADA $8,000Net credit sales $7,500,000Starr estimates that 4% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2014, the allowance for uncollectible accounts should have a credit balance of:a. $12,000.b. $20,000.c. $308,000.d. $300,000.

Answer 1

Answer:

a. $12,000

Explanation:

As the balance of Allowance for Doubtful Accounts it's $8,000, only is needed to record a jornal entry of $4,000 to complete the estimation of 4% of the gross accounts receivables, $12,000.

Initial Balance    

Accounts Receivable  $ 300,000  

Allowance for Doubtful Accounts   $ 8,000

Entry Adjustments

Bad debt expense  $ 4,000  

Allowance for Uncollectible Accounts   $ 4,000

Final Balance    

Accounts Receivable  $ 300,000  

Allowance for Uncollectible Accounts   $ 12,000

Accounts Uncollectible are those credit that the company give and there are not chances of been collected.

When the customers buy products on credits but then the company can't collect the debt, then it's necessary to write off the unpaid bill as uncollectible

One way it's to write-off directly the bad debts at the moment decided that the credit are uncollectible, the total amount it's reported as bad debt expenses which affect negativly the income statement and the accounts receivable are reduce in the same amount, less assets.

The other way it's to determine a percentage of total amount of accounts receivables as uncollectible, exist many ways to analize the accounts receivable and figure the value of uncollectible.

When the company have the percentage of uncollectible accounts the journal entry required is Bad Expenses (debit) with Allowance for Uncollectible Accounts (credit)

At the moment of the write-off as the expenses were before recognized we only use the Allowance for Uncollectible Accounts (Debit) with Accounts Receivable (Credit), with this we are recognizing the uncollectible credit of the company.