29. Before making year-end adjustments for uncollectible accounts, Rock Inc. rep
ID: 2509057 • Letter: 2
Question
29. Before making year-end adjustments for uncollectible accounts, Rock Inc. reported an Allowance for Uncollectible Accounts totaling $50,000 and accounts receivables of s500,000. During the year, Rock had recorded $150,000 in write offs of accounts they had attempted to collect and failed. Their credit sales for the year were $2,000,000, and the cash collections from credit customers totaled $1,870,000 Rock uses the Income Statement approach and estimates uncollectible accounts to be 2% of current year sales. What year-end adjusting entry will Rock make to adjust for estimated uncollectible accounts? A. Debit Gedit Bad Debt Expense Allowance for Uncollectible Accounts 2000 2,600 B. Debit Bad Debt Expense Allowance for Uncollectible Accounts C. Debit Bad Debt Expense 150,000 Accounts Receivable 150,000 D, Debit Bad Debt Expense Allowance for Uncollectible Accounts None of the above E. National Corporation ended 2007 with a credit balance of $125,000 in its Allowance for Uncollectible Accounts and a $2,000,000 debit balance in its Accounts Receivable. The company estimates and records bad debt expense using the income statement method estimating 1% of credit sales as uncollectible. During 2008, National had sales totaling $20,000,000 (50% of which were on credit). National's collections on receivables were strong this year, totaling $5,950,000 and actual write offs of receivables were $50,000. 30. What was the ending balance of Accounts Receivable at the end of 2008? A. $5,900,000 B. $ 6,000,000 C. $ 6,050,000 D. $6,150,000 E. $4,050,000Explanation / Answer
Answer
Correct answer is Option D: Bad Debt expenses debited by $40,000, and allowances account credited.
As question said, uncollectable amount is estimated to be 2% of current year sales, which comes to $40,000 [$2,000,000 x 2%]
Since, Bad debts are not to be directly written off against accounts receivables unless they actually become irrecoverable, they are recognised against Allowances account.
Working Note below provides details as to how to arrive at ending balance of A/R
Account Receivables a/c
Beginning Balance
2,000,000
Cash Collections
5,950,000
Credit Sales
10,000,000
Actual write offs
50,000
TOTAL
$12,000,000
TOTAL
$6,000,000
Ending Balance [12,000,000 – 6,000,000]
$6,000,000
Hence, the correct answer is OPTION B: $6,000,000
Account Receivables a/c
Beginning Balance
2,000,000
Cash Collections
5,950,000
Credit Sales
10,000,000
Actual write offs
50,000
TOTAL
$12,000,000
TOTAL
$6,000,000
Ending Balance [12,000,000 – 6,000,000]
$6,000,000
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