At the beginning of 2014, Mark's sales had the following ledger balances: During the year there were $450,000 of credit sales, $460,000 of collections, and $3,700 of write-offs. At the end of the year, Mark's adjusted for uncollectible account expense using the percent-of-sales
Method, and applied a rate, based on past history, of 1.2%. At the end of the year, what was the balance in the Allowance account?

Question

At the beginning of 2014, Mark's sales had the following ledger balances:  During the year there were $450,000 of credit sales, $460,000 of collections, and $3,700 of write-offs. At the end of the year, Mark's adjusted for uncollectible account expense using the percent-of-sales
Method, and applied a rate, based on past history, of 1.2%. At the end of the year, what was the balance in the Allowance account?

Quizplus · Accepted Answer

First, we need to calculate the total credit sales for the year:
Credit sales = beginning balance + credit sales - write-offs
Credit sales = $830,700 + $450,000 - $3,700
Credit sales = $1,277,000

Next, we need to calculate the amount of uncollectible accounts based on the percent-of-sales method:
Uncollectible accounts = credit sales x percentage rate
Uncollectible accounts = $1,277,000 x 1.2%
Uncollectible accounts = $15,324

Finally, we can calculate the ending balance in the Allowance account:
Ending balance = beginning balance + uncollectible accounts - collections
Ending balance = $2,700 + $15,324 - $460,000
Ending balance = $-442,976

Since the ending balance is negative, this means the company overestimated their uncollectible accounts expense. We need to adjust the ending balance to zero and decrease the uncollectible accounts expense by the difference:
Adjustment = -$442,976 + $15,324
Adjustment = -$427,652

The final ending balance in the Allowance account is:
Ending balance = beginning balance + uncollectible accounts - collections + adjustment
Ending balance = $2,700 + $15,324 - $460,000 - $427,652
Ending balance = $-870,628

Since we cannot have a negative balance in the Allowance account, we need to adjust the balance to zero and increase Bad Debt Expense by the difference:
Adjustment = -$870,628
Bad Debt Expense = Bad Debt Expense + Adjustment
Bad Debt Expense = $870,628

Therefore, the ending balance in the Allowance account is zero, and the amount of uncollectible accounts expense recognized for the year is $870,628. None of the answer choices are correct.

At the Beginning of 2014, Mark's Sales Had the Following