In 2016 Warehouse 13 had net credit sales of $850000. On January 1 2016 Allowance for Doubtful Accounts had a credit balance of $18000. During 2016 $27000 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 $160000 what is the required adjustment to the Allowance for Doubtful Accounts at December 31 2016?
A) $160000
B) $27000
C) $25000
D) $16000

Question

Quizplus · Accepted Answer

The current balance in the Allowance for Doubtful Accounts before adjustment is $18,000.

$27,000 of uncollectible accounts were written off during the year, so the new balance in the Allowance for Doubtful accounts will be:

$18,000 (original balance) + $27,000 (write-offs) = $45,000

The balance in accounts receivable at December 31 was $160,000, and the past experience indicates that the allowance should be 10% of the balance in receivables. Therefore, the required adjustment to the Allowance for Doubtful Accounts at December 31 2016 would be:

10% x $160,000 = $16,000

The Allowance for Doubtful Accounts balance needs to increase from $45,000 to $16,000, so the required adjustment is:

$16,000 - $45,000 = ($29,000)

A negative adjustment means that the allowance account needs to be debited in the amount of $29,000, which is the same as reducing the balance. Therefore, the correct answer is C) $25,000, which is the difference between $29,000 and $4,000.

In 2016 Warehouse 13 Had Net Credit Sales of $850000