At the beginning of 2016,Peter Dots has the following ledger balances:
Accounts receivable

Allowance for doubtful debts

Bad debts expense

During the year,credit sales amounted to $800,000.Cash collected on credit sales amounted to $780,000 and $18,000 was written off.At the end of the year,the company adjusted for bad debts expense using the percentage of sales method and applied a rate,based on past history,of 3.5%.The ending balance of Accounts receivable would be:

Question

At the beginning of 2016,Peter Dots has the following ledger balances:
Accounts receivable

Allowance for doubtful debts

Bad debts expense

During the year,credit sales amounted to $800,000.Cash collected on credit sales amounted to $780,000 and $18,000 was written off.At the end of the year,the company adjusted for bad debts expense using the percentage of sales method and applied a rate,based on past history,of 3.5%.The ending balance of Accounts receivable would be:

Quizplus · Accepted Answer

Beginning balance of Accounts receivable = $0 (not given in the question)
Credit sales during the year = $800,000
Cash collected on credit sales during the year = $780,000
Amount written off during the year = $18,000

Therefore, the ending balance of Accounts receivable before adjustment would be $800,000 - $780,000 - $18,000 = $0.

Next, the company uses the percentage of sales method to estimate the bad debts expense for the year. The rate applied is 3.5% of credit sales of $800,000 = $28,000.

To adjust the allowance for doubtful debts account, we need to increase it by the estimated bad debts expense for the year. So, the ending balance of Allowance for doubtful debts account would be $28,000 (bad debts expense for the year).

Finally, the ending balance of Accounts receivable after adjustment would be $0 + $28,000 = $28,000.

However, we need to deduct the existing balance of Allowance for doubtful debts to arrive at the net realizable value of Accounts receivable. Therefore, the ending balance of Accounts receivable = $28,000 - $2,000 (existing balance) = $26,000.

Hence, the correct answer is C) $42,000 (not an option)

At the Beginning of 2016,Peter Dots Has the Following Ledger