On average, 4% of total accounts receivable has been uncollectible in the past.

Question

On average, 4% of total accounts receivable has been uncollectible in the past. At the end of the year, the balance of accounts receivable is $120,000 and the allowance for doubtful accounts has an unadjusted credit balance of $600. It is estimated that 4% of credit sales are uncollectible, credit sales during the year were $170,000.

Using the aging of accounts receivable method, the estimated bad debt expense would be:

Using the aging of accounts receivable method, the estimated bad debt expense would be:

Explanation / Answer

Ans : The accounts receivables provided above needs to be adjusted here, as 4% of credit sales is going to get uncollectible therefore, 170000 x 4% = 6800$

So, this 6800$ needs to be subtracted from total accounts receivables hence, 120000 - 6800 = 113200$

Now, we have the adjusted balance of accounts receivables of which 4% is uncoolectible as per past experience hence the balance of allowance of doubt full allowance will be 113200 x 4% = 4528$.

From this, the credit balance in the doubtful accounts will be adjusted hence, 4528 - 600 = 3928$ is the estimated bad debt expenses.

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