Question

The Allowance for Doubtful Accounts account has a year-end credit balance, prior to adjustment, of $600. The bad debts are estimated at 4% of $650,000, the net credit sales. After the appropriate adjusting entry for bad debts, what will be the balance of the Allowance for Doubtful Accounts account?

Answer 1

Answer:

$26,600

Explanation:

Bad debts expense based on a percentage of credit sales requires an adjusting entry equal to the percentage of credit sales; no consideration is given to the ending balance of the allowance account when computing the adjustment.

The adjusting entry will include a credit to the Allowance for Doubtful Accounts account for $26,000 (or $650,000 x .04).

Note, however, that this question asks for the ending balance in the allowance account.

Since there is a $600 credit balance prior to adjustment, the balance in the allowance account after adjustment will be $26,600

(the credit balance of $600 + a credit of $26,000 will yield an ending credit balance of $26,600).

Answer 2

Answer:

$26600

Explanation:

The bad debits are estimated at 4% of $650000 which is = 0.04 * 650000

which is equal to  $26000. from the question above the the year end credit balance of the company prior to adjustment is $600 therefore after the adjustment made due to bad debts the balance of the allowance for doubtful accounts will be : estimated bad debts + credit balance = $26000 + $600 = $26600

Bad debts are debts been owed a company by its debtors or customers which might not be recovered and the little the percentage the better for the company.