On January 1, 2016, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius Company carried balances of $20,000 and $550 respectively.During the year, the company reported $70,000 of credit sales.There were $400 of receivables written off as uncollectible in 2016.Cash collections of receivables amounted to $74,700.The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance.
The amount of bad debts expense recognized in the 2016 income statement will be:
A) $545
B) $595
C) $745
D) $795

Question

On January 1, 2016, the Accounts Receivable and the Allowance for Uncollectible Accounts for Darius Company carried balances of $20,000 and $550 respectively.During the year, the company reported $70,000 of credit sales.There were $400 of receivables written off as uncollectible in 2016.Cash collections of receivables amounted to $74,700.The company estimates that it will be unable to collect 5% of the year-end accounts receivable balance. ​
The amount of bad debts expense recognized in the 2016 income statement will be:
A) $545
B) $595
C) $745
D) $795

Quizplus · Accepted Answer

To calculate the bad debt expense, we need to consider the following:

1. Beginning balance of Accounts Receivable = $20,000
2. Credit Sales during the year = $70,000
3. Receivables written off as uncollectible = $400
4. Cash collections of receivables = $74,700
5. Estimated uncollectible amount at year-end = 5% of ending balance of Accounts Receivable

Using this information, we can calculate the ending balance of Accounts Receivable as follows:

Beginning balance of Accounts Receivable + Credit Sales - Receivables written off - Cash collections = Ending balance of Accounts Receivable
$20,000 + $70,000 - $400 - $74,700 = $15,900

The estimated uncollectible amount at year-end is 5% of $15,900, which is $795.

To calculate the bad debt expense, we need to adjust the Allowance for Uncollectible Accounts balance to the estimated uncollectible amount at year-end:

Allowance for Uncollectible Accounts balance = $550 
Add: Bad debt expense = $795 
Adjusted allowance for uncollectible accounts balance = $1,345

The bad debt expense recognized in the income statement is the increase in the allowance for uncollectible accounts, which is $795 - $550 = $245.

Therefore, the correct answer is B) $595.