Asked by aasiyyah ceasor on Jul 09, 2024
Verified
In 2016 Winslow Company had net credit sales of $1250000. On January 1 2016 Allowance for Doubtful Accounts had a credit balance of $25000. During 2016 $32000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis) . If the accounts receivable balance at December 31 was $360000 what is the required adjustment to the Allowance for Doubtful Accounts at December 31 2016?
A) $29000
B) $36000
C) $43000
D) $6000
Percentage of Receivables Basis
An accounting method to estimate the allowance for doubtful accounts based on the expected uncollectibility of accounts receivable.
Allowance for Doubtful Accounts
A contra-asset account that reduces the total receivables reported on the balance sheet to reflect the amount expected to be uncollectible.
- Gain insight into the functionality of the aging method and percentage bases (sales and receivables) for bad debt approximation.
- Work out the revisions needed for bad debt costs and understand their effect on the value of cash realizable.
Verified Answer
YR
Yulissa RodriguezJul 15, 2024
Final Answer :
C
Explanation :
The required adjustment to the Allowance for Doubtful Accounts can be calculated using two methods - aging of accounts receivable and percentage of receivables basis. Here, we are given that the company uses the percentage of receivables basis which requires the allowance to be a certain percentage of the balance in receivables.
Step 1: Calculate the required balance for the Allowance for Doubtful Accounts using the percentage of receivables basis:
Required balance = 10% of accounts receivable at December 31, 2016
Required balance = 10% of $360,000 = $36,000
Step 2: Calculate the current balance for the Allowance for Doubtful Accounts:
Current balance = Credit balance of $25,000 on January 1, 2016 - $32,000 of uncollectible accounts receivable written off during 2016
Current balance = $25,000 - $32,000 = -$7,000
Since the current balance is a credit balance, it means that the allowance was not sufficient to cover the actual bad debts written off during the year. Therefore, we need to increase the allowance by the difference between the required balance and the current balance.
Step 3: Calculate the required adjustment to the Allowance for Doubtful Accounts:
Required adjustment = Required balance - Current balance
Required adjustment = $36,000 - (-$7,000) = $43,000
Therefore, the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016 is $43,000. The answer is C.
Step 1: Calculate the required balance for the Allowance for Doubtful Accounts using the percentage of receivables basis:
Required balance = 10% of accounts receivable at December 31, 2016
Required balance = 10% of $360,000 = $36,000
Step 2: Calculate the current balance for the Allowance for Doubtful Accounts:
Current balance = Credit balance of $25,000 on January 1, 2016 - $32,000 of uncollectible accounts receivable written off during 2016
Current balance = $25,000 - $32,000 = -$7,000
Since the current balance is a credit balance, it means that the allowance was not sufficient to cover the actual bad debts written off during the year. Therefore, we need to increase the allowance by the difference between the required balance and the current balance.
Step 3: Calculate the required adjustment to the Allowance for Doubtful Accounts:
Required adjustment = Required balance - Current balance
Required adjustment = $36,000 - (-$7,000) = $43,000
Therefore, the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016 is $43,000. The answer is C.
Learning Objectives
- Gain insight into the functionality of the aging method and percentage bases (sales and receivables) for bad debt approximation.
- Work out the revisions needed for bad debt costs and understand their effect on the value of cash realizable.
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