In 2016 Winslow Company had net credit sales of $1250000. On January 1 2016 Allowance for Doubtful Accounts had a credit balance of $25000. During 2016 $32000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $360000 what is the required adjustment to the Allowance for Doubtful Accounts at December 31 2016?
A) $29000
B) $36000
C) $43000
D) $6000

Question

Quizplus · Accepted Answer

The required adjustment to the Allowance for Doubtful Accounts can be calculated using two methods - aging of accounts receivable and percentage of receivables basis. Here, we are given that the company uses the percentage of receivables basis which requires the allowance to be a certain percentage of the balance in receivables.

Step 1: Calculate the required balance for the Allowance for Doubtful Accounts using the percentage of receivables basis:

Required balance = 10% of accounts receivable at December 31, 2016
Required balance = 10% of $360,000 = $36,000

Step 2: Calculate the current balance for the Allowance for Doubtful Accounts:

Current balance = Credit balance of $25,000 on January 1, 2016 - $32,000 of uncollectible accounts receivable written off during 2016
Current balance = $25,000 - $32,000 = -$7,000

Since the current balance is a credit balance, it means that the allowance was not sufficient to cover the actual bad debts written off during the year. Therefore, we need to increase the allowance by the difference between the required balance and the current balance.

Step 3: Calculate the required adjustment to the Allowance for Doubtful Accounts:

Required adjustment = Required balance - Current balance
Required adjustment = $36,000 - (-$7,000) = $43,000

Therefore, the required adjustment to the Allowance for Doubtful Accounts at December 31, 2016 is $43,000. The answer is C.

In 2016 Winslow Company Had Net Credit Sales of $1250000