At year end, the accounts for Doug’s Doohickeys show the following balances prior to adjusting entries:
Accounts Receivable: $10,000 debit balance
Allowance for Uncollectible Accounts: $3,500 credit balance
Sales were $1,000,000 and 40% of the sales were on credit.
If Doug deems that .4% of his accounts won’t be collected, what is the balance of the Allowance for Uncollectible Accounts going to be?
Explanation
Answer - B - The balance of the Allowance for Uncollectible Accounts is going to be $5,100:
$1,000,000 x 40% is $400,000 of accounts receivable for the year. 4% (.004) of this amount is $1,600. $1,600 + $3,500 = $5,100.
Key Takeaway: The Allowance for Uncollectible Accounts carries a credit balance-the current year’s allowance would be calculated using the A/R for the year, along with the uncollectible percentage. That will be added to the current balance. Also note that the numbers are tricky. Be sure to read them carefully, as in .4% vs. 4%.
