At the start of the current year, a company's Allowance for Doubtful Accounts had a credit balance of $36,000. During the current year, it had net credit sales of $1,500,000 and it wrote-off $60,000 of accounts receivable as uncollectible. The company's accounts receivable at the end of the year is $400,000. What is the required adjustment to the Allowance for Doubtful Accounts at the end of the year if past experience indicates that the allowance should be 10% of the balance in receivables? Group of answer choices:

Bad Debts expense is $ 64,000

Explanation:

Computation of Bad Debts expense

Receivable balance at end of year $ 400,000

Estimated uncollectible accounts 10 %

Balance of Uncollectible accounts ($ 400,000 * 10 %) $ 40,000

Existing balance in allowance for uncollectible accounts

Opening balance $ (36,000)

Less: Receivables written off $ 60,000

Balance of allowance account before adjustment $ 24,000

Required balance is $ (40,000)

Adjustment entry required for bad debts $ 64,000

The adjusting entries are as below:

Dr bad debt expense $4000

Cr Allowance for doubtful accounts $4000

Explanation:

The new allowance for doubtful accounts should be calculated as 10% of the closing balance of accounts receivable, i, e 10% of $400000=$40000

The new $40000 estimates of allowance for doubtful accounts means that the closing balance in allowance for doubtful accounts should be $40000 credit balance.

Since the opening balance was $36000 credit, the extra amount to top it up to $40000 is $4000 ($40000-$36000)

Hence, the required adjustment to the allowance for doubtful accounts is shown below

Dr bad debt expense $4000

Cr Allowance for doubtful accounts $4000