At the end of the current year, Accounts Receivable has a balance of $550,000; A
ID: 2486153 • Letter: A
Question
At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine the net realizable value of accounts receivable after adjustment. (Hint: Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance of Doubtful Accounts.) A.550,000 B. 525,000 C.575,000 D.544,500
Explanation / Answer
Credit balance in Allowance for Doubtful Accounts = $5,500
Estimated uncollectible receivables = $25,000
Therefore, an adjustment would be required to increase the credit balance in Allownace for Doubtful Accounts by $19,500 so that it becomes equal to the estimated uncollectible receivables, $25,000.
This adjustment is made through the following adjusting entry:
Debit Bad Debt Expense ------------- $19,500
Credit Allowance for Doubtfull --------------------- $19,500
Once the adjutment is made, the credit balance in Allowance for Doubtful Accounts will become $25,000.
Net realizable value of Accounts Receivable is determine by subtracting the credit balance in Allowance for Doubtful Accounts from the balance of Accounts receivable.
Therefore, $25,000 will be subtracted from $550,000 to get net realizable value of accounts receivable.
Net realizable value of accounts receivable = $550,000 - $25,000 = $525,000.
Correct answer is B.
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