Question

Bramble Corp.has outstanding accounts receivable totaling $6.35million as of December 31 and sales on credit during the year of $26.6million. There is also a debit balance of $11500in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables 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:

$496,500

Explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.  

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

As such, the debit balance of $11500 in the allowance for doubtful accounts is for debts that have gone bad.

Given that the company estimates that 8% of its outstanding receivables will be uncollectible, this amounts to

= 8% * $6.35 million

= 0.508 million

= $508,000

This amount will be posted as an adjustment at year end to the bad debt expense account (as a debit) and the allowance account (as a credit).

Hence balance in the allowance for doubtful accounts after the year-end adjustment

= $508,000 - $11,500

= $496,500