Question

At January 1, 20X7, Gear Co. had a credit balance of $180,000 in its Allowance for Doubtful Accounts. Based on past experience, 3% of Gear’s credit sales have been uncollectible. During 20X7, Gear wrote off $210,000 of uncollectible accounts. Credit sales for 20X7 were $4,500,000. In its December 31, 20X7 balance sheet, what amount should Gear report as Allowance for Doubtful Accounts?

Answer 1

Answer:

$105,000

Explanation:

The journal entries to record and adjust the transactions should be as follows:

Writing off bad debt:

Dr Allowance for doubtful accounts 210,000

    Cr Accounts receivable 210,000

that leaves the balance of allowance for doubtful accounts at $180,000 - $210,000 = -$30,000 or $30,000 debit balance.

the adjusting entry made at the end of the year ($4,500,000 x 3%):

Dr Bad debt expense 135,000

    Cr Allowance for doubtful 135,000

the balance for allowance of doubtful accounts = $135,000 - $30,000 = $105,000