I DO NOT NEED THE ANSWER!! I NEED THE EXPLANATION TO THE ANSWER Wellington Corp.

Question

I DO NOT NEED THE ANSWER!! I NEED THE EXPLANATION TO THE ANSWER

Wellington Corp. has outstanding accounts receivable totaling $5 million as of December 31 and sales on credit during the year of $25 million. There is also a debit balance of $20,000 in 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?

a.   $2,000,000.

b.   $   380,000.

c.   $   400,000.

d.   $   420,000.

I have the answer key and it says the answer is c. 400,000 but I think it is 380,000. I thought 400,000 is the adjusted uncollectible amount since they used the percentage of accounts receivable method. So, why is the answer 400,000?

Explanation / Answer

$5 m

$5,000,000 * 8% = $400,000

But since there is debit balance we need to make adjustment entry of $420,000 ( $400,000 + 20,000)

Adjusting entry is

Bad debts expense $ 420,000

To Allowance for doubtful debts $420,000

Hence after the adjustment the balance in Allowance for doubtful debts will be $400,000

T- accounts

opening balance     $20,000               dec 31 adjusting entry           $420,000

Balance                 $400,000 (CR)

Hope this explains

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