Question

in 2018, Oriole Company had net credit sales of $1125300. On January 1, 2018, Allowance for Doubtful Accounts had a credit balance of $26100. During 2018, $42000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 12% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $376000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2018?

$45120

$29220

$119136

$61020

Answer 1

When using the percentage of receivables allowance method for estimating bad debts, the credit balance in Allowance for Doubtful Accounts AFTER the adjustment must equal the amount that is estimated to be uncollectible. Allowance for Doubtful Accounts had a credit balance of 26,100. After the write-off of $42,000:
Dr Allowance for Doubtful Accounts 42,000
Cr Accounts Receivable 42,000

There is now a debit balance of $15,900 in Allowance for Doubtful Accounts. The amount that is estimated to be uncollectible is 376,000 x 10% = $45,120. So you have to make an entry that will convert that debit balance of 15,900 to a credit balance of 45,120.
Dr Bad Debt Expense 61,020
Cr Allowance for Doubtful Accounts 61,020

Answer is D. $61,020