Question

Calistoga Produce estimates bad debt expense at 0.60% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $487,000 and $1,520 respectively, at December 31, 2020. During 2021, Calistoga's credit sales and collections were $331,000 and $317,000, respectively, and $1,740 in accounts receivable were written off. Calistoga's final balance in its allowance for uncollectible accounts at December 31, 2021, is:

Answer 1

Answer: Calistoga's final balance in its allowance for uncollectible accounts at December 31, 2021 is $246.

Explanation: Calistoga Produce applies percentage of credit sales method to estimate its bad debt expense. So 0.60% of $331,000 (credit sales) = $1,986 and the balance in allowance for doubtful accounts is $1,520. The following journals would be recorded to adjust for the estimate:

Debit Bad debt expense                                      $466

Credit Allowance for doubtful accounts           $466

The $466 is the difference between $1,986 and $1,520

Now that the company writes off $1,740 accounts receivable, the following journal entries apply:

Debit Allowance for doubtful account              $1,740

Credit Accounts receivable                                $1,740

In summary, the allowance account movement is as follows:

Opening balance                                                 $1,520

Additional bad debt expense                                 466

Write-off during the year                                     (1,740)

Balance, end of the year                                       $246