Ace Computing Company
On January 1, the Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were $500 of receivables written off as uncollected during the year. Cash collections of receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance.
-Refer to the Ace Computing Company. The amount of bad debts expense recognized in the income statement will be:

Question

Quizplus · Accepted Answer

The bad debts expense is calculated by adjusting the Allowance for Doubtful Accounts to the desired ending balance based on the 4% estimation of the year-end accounts receivable balance. First, calculate the year-end accounts receivable balance: Beginning balance + Credit sales - Write-offs - Cash collections = $40,000 + $80,000 - $500 - $78,200 = $41,300. The desired ending balance for the Allowance for Doubtful Accounts is 4% of $41,300 = $1,652. The beginning balance of the Allowance for Doubtful Accounts is $1,500, and $500 was written off, so the adjustment needed to reach the desired ending balance is $1,652 - ($1,500 - $500) = $652.

Ace Computing Company on January 1, the Accounts Receivable and the Allowance for the Allowance