Question

Net sales for the month are $800,000, and bad debts are expected to be 1.5% of net sales. The company uses the percentage-of-sales basis. If the Allowance for Doubtful Accounts has a credit balance of $15,000 before adjustment, what is the balance after adjustment

Answer 1

Answer:

The balance of the Allowance for Doubtful Accounts after adjustment is $27,000.  This represents 1.5% of $800,000 net sales (to be charged to bad debt expense for the month) plus the credit balance of $15,000.

Explanation:

An Allowance of Doubtful Accounts is established at the same period when sales take place since an entity is not certain of the amount it will eventually receive from its credit customers.  This allowance is an estimate for bad debts.

Using the percentage-of-sales basis, the company can provide in advance an educated guess of probable bad debts to be incurred using an established rate.

Answer 2

Answer:

$27,000

Explanation:

Allowance for doubtful accounts before adjustment       $15,000

Allowance provided for the month;

$800,000*1.5%                                                                     $12,000

Closing balance for Doubtful Accounts                             $27,000

The allowance for doubtful accounts is provided on net sales basis therefore sales are multiplied with %  of bad debt allowance given in question.