Question

Wren Company had the following account balances at December 31, Year 1:

Accounts receivable		$ 900,000
Allowance for doubtful accounts before any provision for Year 1 doubtful accounts expense)		16,000
Credit sales for Year 1		1,750,000

Wren is considering the following method of estimating doubtful accounts expense for year 1:

•		Based on credit sales at 2%
•		Based on accounts receivable at 5%

What amount should Wren charge to doubtful accounts expense under each method?

Percentage of credit sales

Percentage of accounts receivable

$35,000

$45,000

$35,000

$29,000

$51,000

$29,000

$51,000

$45,000

Answer 1

Answer: $35,000: $29,000

.

.

Doubtful accounts expense based on credit sales:

= Credit sales x 2%

= $1,750,000 x 2%

= $35,000

.

Doubtful accounts expense based on accounts receivable:

Step 1:

Calculation of balance of Allowance for doubtful accounts after the provision

= Accounts receivable x 5%

= $900,000x 5%

= $45,000

.

Step 2:

Calculation of Doubtful accounts expense

= Allowance for doubtful accounts after the provision - Allowance for doubtful accounts before the provision

= $45,000 - $16,000

= $29,000