California Cannery began in 2008 with a debit balance in Accounts recievable $15

Question

California Cannery began in 2008 with a debit balance in Accounts recievable $150,000 and a credit balance in Allowance for Doubtful Accounts for 7,500 for the year. During the year California Cannery sold 1,300,000 of product and collected 1,350,000 from customers. In addition $4,000 of Accounts receivable balance was written off as uncollectable during the year. Management uses the allowance method to account for bad debts and believes that ultimately 5% of the year-end balance in accounts recievable will not be collected. How much bad debt expense will be recorded in 2008?

Explanation / Answer

Beginning balance in AR is 150,000. Since they collected 50,000 more than they sold, this reduces the AR to 100,000. Then 4,000 write-offs then reduce AR to 96,000. The 4,000 in write-offs also reduces the allowance account to 3,500. So at the end of the year AR is 96,000 and the allowance for doubtful accounts is 3,500. since they expect 5% of the balance in AR to not be collected, 96,000*0.05 = 4,800, so they will want the allowance account to equal 4,800. This can be done by increasing the allowance account by 1,300, which will mean a bad debt expense of 1,300.

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