In 2015, Warehouse 13 had net credit sales of $750,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $16,000. During 2015, $29,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivable basis). If the accounts receivable balance at December 31 was $150,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2015?

Question

Quizplus · Accepted Answer

The required adjustment to the allowance for doubtful accounts can be calculated as follows:

Step 1: Calculate the required balance in the allowance for doubtful accounts using the percentage of receivables basis.
Required balance = 10% x $150,000 = $15,000

Step 2: Determine the necessary adjustment to the allowance for doubtful accounts.
First, we need to consider the current balance in the allowance for doubtful accounts. Since it had a credit balance of $16,000 on January 1, a credit balance of $15,000 at December 31 is appropriate. This means that no adjustment is needed for the credit balance already in place.

To calculate the necessary adjustment, we need to consider the $29,000 of uncollectible accounts written off during the year. This amount reduces the balance in receivables that is subject to the percentage of receivables basis calculation. 
Adjusted receivable balance = $150,000 - $29,000 = $121,000
 
The adjustment needed to bring the allowance balance from $16,000 to $15,000 (the required balance) is:
Adjustment needed = Required balance - Current balance 
= $15,000 - $16,000 
= ($1,000)

This means that the allowance for doubtful accounts needs to be reduced by $1,000 at the end of the year, resulting in a credit balance of $15,000. Therefore, the correct choice is C) $28,000.

In 2015, Warehouse 13 Had Net Credit Sales of $750,000