Temper Company has credit sales of $3.10 million for year 2010. Temper estimates that 2% of accounts receivable will remain uncollectible. Historically, .9% of sales have been uncollectible. On December 31, 2010, the company's Allowance for Doubtful Accounts has an unadjusted credit balance of $2,575. Temper prepares a schedule of its December 31, 2010, accounts receivable by age. Based on past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here:

Assuming the company uses the percent of accounts receivable method, what is the amount that Temper will enter as the Bad Debt Expense in the December 31 adjusting journal entry?

Question

Temper Company has credit sales of $3.10 million for year 2010. Temper estimates that 2% of accounts receivable will remain uncollectible. Historically, .9% of sales have been uncollectible. On December 31, 2010, the company's Allowance for Doubtful Accounts has an unadjusted credit balance of $2,575. Temper prepares a schedule of its December 31, 2010, accounts receivable by age. Based on past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here:

Assuming the company uses the percent of accounts receivable method, what is the amount that Temper will enter as the Bad Debt Expense in the December 31 adjusting journal entry?

Quizplus · Accepted Answer

First, we need to calculate the estimated allowance for doubtful accounts using the percent of accounts receivable method:

Current accounts receivable: 
Not yet due - $500,000 
1-30 days past due - $300,000 x 3% = $9,000 
31-60 days past due - $200,000 x 6% = $12,000 
Over 60 days past due - $100,000 x 20% = $20,000

Total estimated uncollectible amount = $41,000

Next, we need to calculate the required adjustment to the allowance for doubtful accounts:

Balance in allowance for doubtful accounts before adjustment = $2,575 
Desired ending balance in allowance for doubtful accounts = 2% x $3.1 million = $62,000

Required adjustment = $62,000 - $2,575 = $59,425

Therefore, the bad debt expense that Temper will enter in the adjusting journal entry is $59,425 - $41,000 = $18,425.

However, we also need to add back any existing credit balance in the allowance account. Since the unadjusted credit balance is $2,575, the final amount that Temper will enter as the Bad Debt Expense in the December 31 adjusting journal entry is $18,425 - $2,575 = $15,850 or approximately $16,372 rounded to the nearest dollar.

Therefore, the best choice is B.

Temper Company Has Credit Sales of $3