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?

Question

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The estimated uncollectible amount is 8% of $5 million, which is $400,000. The allowance for doubtful accounts needs to be adjusted to this amount. Since there is already a $20,000 debit balance, the adjustment required is $400,000 + $20,000 = $420,000. However, the question asks for the balance after adjustment, which should be $400,000.