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26 July, 05:15

McGlone Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of $40,000. During 2020, it wrote off $28,000 of accounts and collected $8,400 on accounts previously written off. The balance in Accounts Receivable was $800,000 at 1/1 and $960,000 at 12/31. At 12/31/20, McGlone estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for Doubtful Accounts at 12/31/20?

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  1. 26 July, 07:30
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    McGlone should report $48,000 (5% x $960,000) as its Allowance for Doubtful Accounts at 12/31/20 by recognizing bad debt expense of $27,600.

    Debit Bad debt expense $27,600

    Credit Allowance for Doubtful Accounts $27,600

    (To recognize bad debt expense for the year)

    Explanation:

    The following required journals are necessary to reconcile the balance in Allowance for Doubtful Accounts:

    Debit Allowance for Doubtful Accounts $28,000

    Credit Accounts Receivable $28,000

    (To recognize write-off on accounts)

    Debit Accounts Receivable $8,400

    Credit Allowance for Doubtful Accounts $8,400

    (Recognition of accounts receivable previously written off)

    Debit Cash $8,400

    Credit Accounts Receivable $8,400

    (Recognition of cash collection on accounts receivable previously written off)

    Based on the adjustments above, the Allowance for Doubtful Accounts would be: Opening balance - Write-off + Reinstated written-off amount, that is: $40,000 - $28,000 + $8,400 = $20,400 Since McGlone estimates 5% of accounts receivable as uncollectible, 5% of $960,000 is $48,000. Therefore, bad debt expense (addition to the allowance account) would be $27,600 ($48,000 - $20,400).
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