A company has an ending accounts receivable balance of $1,800,000 and it estimates that uncollectible accounts will be 2% of the receivable balance. If Allowance for Doubtful Accounts has a credit balance of $4,000 prior to adjustment, its balance after adjustment will be a credit of
A)$40,000.
B)$36,000.
C)$35,920.
D)$32,000.

Question

Quizplus · Accepted Answer

To find the ending balance of the Allowance for Doubtful Accounts, we need to use the following formula:

Ending balance of Allowance for Doubtful Accounts = Beginning balance of Allowance for Doubtful Accounts + Bad Debt Expense - Write-offs

We are given that the beginning balance of Allowance for Doubtful Accounts is a credit of $4,000. We are also given that the company estimates uncollectible accounts to be 2% of the $1,800,000 ending balance of accounts receivable. Therefore, Bad Debt Expense is:

Bad Debt Expense = 2% x $1,800,000 = $36,000

So, the ending balance of Allowance for Doubtful Accounts is:

Ending balance of Allowance for Doubtful Accounts = $4,000 + $36,000 - 0 = $40,000

Therefore, the answer is B) $36,000.

A Company Has an Ending Accounts Receivable Balance of $1,800,000