Micelle Inc. reported credit sales of $700,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year?

Question

Quizplus · Accepted Answer

The credit sales were $700,000, and the bad debt expense is estimated at 1% of credit sales, so the bad debt expense is $7,000. The beginning balance of the allowance for doubtful accounts was $40,000, so the total amount available for bad debt expense is $47,000 ($40,000 + $7,000). 
Since there are no write-offs made during the year, the ending balance in accounts receivable of $1,500,000 should match the sum of the cash sales of $100,000 and the credit sales of $700,000 less the bad debt expense of $7,000, which equals $793,000. 
Therefore, the ending balance in the allowance for doubtful accounts should be $1,500,000 - $793,000 = $707,000. However, we already had a beginning balance of $40,000, so the required adjustment to the allowance for doubtful accounts is $707,000 - $40,000 = $667,000.