The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad debt expense. The company's management estimates that 2% of net credit sales will be uncollectible for the year 2015. Net credit sales for the year amounted to $250,000. What will be the balance of the Allowance for Bad Debts reported on the balance sheet at December 31, 2015?

Question

Quizplus · Accepted Answer

To calculate the balance of the Allowance for Bad Debts at December 31, 2015, we need to determine the amount of bad debt expense for the year using the estimated percentage of uncollectible net credit sales.

Bad debt expense = net credit sales x estimated percentage of uncollectible accounts
Bad debt expense = $250,000 x 2% = $5,000

Then, we need to adjust the balance in the Allowance for Bad Debts account to reflect this expense. Since the Allowance for Bad Debts account already has a credit balance of $2,000, we can assume that some portion of this balance was created in previous years to account for uncollectible accounts. Therefore, we need to increase the balance in the account by the amount of the current year's bad debt expense of $5,000.

Allowance for Bad Debts balance = previous balance + current year's bad debt expense
Allowance for Bad Debts balance = $2,000 + $5,000 = $7,000

Therefore, the balance of the Allowance for Bad Debts reported on the balance sheet at December 31, 2015 will be $7,000, which is choice C.

The Allowance for Bad Debts Account Has a Credit Balance